PROJECT PROCUREMENT MANAGEMENT:

PROCUREMENT STRATEGY – THE MISSING LINK

BETWEEN PROJECT AND BUSINESS STRATEGIES IN THE
OIL & GAS INDUSTRY

By
SAEED AHMED AL MAHRI
(ID NO. 20050014)

M.SC. IN PROJECT MANAGEMENT

(OIL & GAS)
– FINAL DISSERTATION –

ADVISOR: DR. MOHAMMED F. DULAIMI



INSTITUTE OF ENGINEERING
THE BRITISH UNIVERSITY IN DUBAI
BUiD

FEBRUARY 2007
 ACKNOWLEDGEMENT

My genuine gratitude to the following people:

1. Dr. Mohammed F. Dulaimi, Sr. Lecturer, Project Management, BUiD, for his

guidance and supervision to this Dissertation and support for the research.

2. Dr. Jamal Al Bahar, PMP, President, PROMIS-Group, for his valuable ideas, review

and support on developing this Dissertation.

3. Dr. Sami Freig, Civil Engineering Professor, Kuwait University, for his suggestions

and ideas on topics and approaches for the Dissertation.

4. Mr. Mahiyar Morawala, Clerical Services Supervisor, for his review and great support

on presentation of this Dissertation.

5. Mr. Syed Abdul Kader, Contracts Assistant, for his help on presentation of this

Dissertation.

6. Hyder Consultancy, Mr. Stuart and staff for their support and participation in the

Survey Questionnaire of the Research.

7. All my colleagues and staff at Procurement & Contracts Division, for their continuous

support and participation in the Survey Questionnaire of the Research.

 ABSTRACT

This Dissertation provides insights into improving aspects of Project Management in UAE. A
research is conducted in order to assess the impact of Procurement Strategy on Business and
Project Strategies with respect to management of Oil & Gas projects.

UAE is rapidly developing and International as well as local companies are participation in
hundreds of varied on-going projects. To elicit and maintain interest of majors, Procurement
of projects should be towards achieving strategic objectives and improving relationships.

The Aim of the research is to detect the link between Project and Business Strategies.
Procurement Strategy is identified as the missing link and, as a Hypothesis to the Research,
to solve project problems in meeting objectives. Research objectives are to assess influence of
Procurement Strategy on Projects/Business Strategies, show how current Procurement
Strategies are impediments in achieving project and strategic objectives and identify elements
of Procurement Strategy that aim at achieving strategic objectives.

The Literature reviewed on current knowledge of related issues suggested the inter-relation of
Business to Project Strategies through Portfolio and Programs Strategies. The links to
Procurement Strategy for outsourced projects in the Supply chain was explored extensively.

Research Methodologies of Quantitative and Qualitative methods were adopted to test the
Hypothesis and assess Objectives of the research. Questionnaire for investigating the strategic
role of Project Procurement in Oil & Gas was developed. As a qualitative method, a Case
Study for surveying four major projects in Refining industry within Oil & Gas was also
developed. The case study involved surveying different parties of the projects to assess
problems in projects Procurement. These methods generated valuable ideas in supporting the
position of project Procurement in Oil & Gas industry projects towards achieving objectives.

Data of the surveys responses were then presented in the both forms (Quantitative and
Qualitative responses). The data was then analyzed with the findings from Literature to
propose the recommended actions.

Recommendations cover Linking Procurement to Business Strategy in Oil & Gas and
proposing Procurement Strategies to overcome problems in Oil & Gas Projects.
Conclusions have been finally derived and a subject of investigating Procurement Strategies
on Project Performance was suggested for further research.

STUDENT ID: 20050014 PAGE ii

 TABLE OF CONTENTS

CHAPTER DESCRIPTION PAGES

List of Tables .......................................................................................................... i

List of Figures .......................................................................................................... ii

1. INTRODUCTION ........................................................................................... 1
1.1 Purpose of the Dissertation ....................................................................... 1
1.2 Background Information .......................................................................... 1
1.3 Problem Statement .................................................................................... 2
1.4 Aim, Objectives and Hypothesis of the Research ..................................... 3
1.5 Description of Dissertation Contents ........................................................ 5

2. CORPORATE & BUSINESS STRATEGY AND THE LINK TO PROJECT

STRATEGY ..................................................................................................... 6
2.1 Overall Corporate and Business Strategy ................................................. 6
2.2 Project Strategy ........................................................................................ 7
2.3 Link to Business Strategy through Program and Portfolio ....................... 8

3. SUPPLY CHAIN MANAGEMENT AND PROCUREMENT ................... 18

3.1 Supply Chain Management and Strategy .................................................. 18
3.2 Introducing Project Procurement Strategy ............................................... 25

4. PROCUREMENT STRATEGIES AND PROCESSES ............................... 27

4.1 Procurement Strategies.............................................................................. 27
4.2 Project Delivery Methods and Procurement Systems ............................... 29
4.3 Strategic Contractor Selection and Evaluation Criteria ........................... 36
4.4 Procurement in Improving Relationships ................................................. 38
4.5 Legal Implications, Contract Management and Strategy .......................... 40
4.6 Procurement in Handling Disputes and Delays ........................................ 51
4.7 Summary of Findings from Literature .................................................... 53

5. METHODOLOGY AND EMPIRICAL WORK ......................................... 54

5.1 Corporate / Business Strategy for TK Co. ............................................... 55
5.2 Data Collection.......................................................................................... 58

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 5.3 Research Methodology.............................................................................. 58
5.4 Questionnaire – Quantitative Method ...................................................... 58
5.5 Projects Case Studies – Qualitative Method ............................................ 60

6. PRESENTATION ANALYSIS AND DISCUSSION OF RESULTS .......... 61

6.1 Presentation of Results – 1 Methodology ..............................................
st
61
6.1.1 Analysis of Results and Discussion – 1st Methodology ........................... 63
6.2 Presentation, Analysis and Discussion of Results – 2nd Methodology .... 68

7. RECOMMENDATIONS ................................................................................ 84
7.1 Procurement Methods and Systems for Oil & Gas Projects .................... 85
7.2 Contracts Management and Strategy for Oil & Gas Projects .................. 86
7.3 Procurement Strategy in Oil & Gas to Realise Business Strategy ............ 88

8. CONCLUSIONS AND FUTURE RESEARCH ............................................ 92

Annexure 1 – Phases & Activities of Oil & Gas Major Projects .............................. 93
Annexure 2 – Procurement Strategy Questionnaire Form ......................................... 95
Annexure 3 – Case Study Project Survey Form ........................................................ 96
Annexure 4 – Interview with Projects Division Manager.......................................... 99
Annexure 5 – Interview with Projects Procurement Services Manager .................... 101
Annexure 6 – Procurement Strategy Checklist for Oil & Gas Project ...................... 104
Glossary of Terms .................................................................................................... 106
References ................................................................................................................. 107

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 LIST OF TABLES

Table 1 Comparison between Program and Project Management, (Martinelli and

Waddel, 2004).

Table 2 The Project, Program and Portfolio Management, (PMFORUM, 2001).

Table 3 Responses to linking Procurement Strategy to Corporate / Business Strategy.

Table 4 Responses to contents of Procurement Strategy in Oil & Gas.

Table 5 Percentages of responses to Procurement Strategy in Oil & Gas.

Table 6 Percentages of responses to contents of Procurement Strategy in Oil & Gas.

Table 7 Details of Halon Replacement from Refineries Project.

Table 8 Details of Inter-Refinery Project (IRP) Project.

Table 9 Details of Operational Improvement to Refinery 1 Project.

Table 10 Details of Refinery 2 Expansion Project.

Table 11 Problems in Procurement for the four projects studied

Table 12 Suggestions to Procurement in the four projects studied.

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 LIST OF FIGURES

Figure 1 Business, Project and Procurement Strategies proposed Model.

Figure 2 The link between Portfolio, Program and Project Management.

Figure 3 The strategic relationships in product delivery, (Martinelli & Waddel, 2004).

Figure 4 The link through Program Management, (Martinelli & Waddel, 2004).

Figure 5 The Business Strategy through Portfolio and Program Management, (a) Top

Down structure and (b) Value creation of projects, (Michel & Manon, 2007).

Figure 6 Supply chain in the Services sector in the US (a,b& c), (Ellram e al., 2004).

Figure 7 Supply chain in Manufacturing in the US, (Ellram e al., 2004).

Figure 8 ISM Integration Architecture, (Lan, 2003).

Figure 9 The strategic clients activities of SCM and relationships, (Cheung, 2004).

Figure 10 SDM of Project Procurement Selection method, (Chritamara et al., 2001).

Figure 11 Procurement systems and its sub-systems a & b, (Kumaraswamy, 2006).

Figure 12 The percentages of total population requested, total responses and sample

responses.

Figure 13 Number of respondents agreeing to link Procurement Strategy to Business

Strategy for projects in Oil & Gas industry.

Figure 14 Number of respondents agreeing to contents of strategic Procurement Strategy

for projects in Oil & Gas industry.

Figure 15 Analysis of respondents agreeing to link Procurement Strategy to Business

Strategy for projects in Oil & Gas industry.

Figure 16 Analysis of respondents agreeing to contents of strategic Procurement Strategy

for projects in Oil & Gas industry.

Figure 17 Modified of proposed Procurement Strategy Model through Literature.

Figure 18 Final Procurement Strategy Developed Model.

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 Chapter 1
1. INTRODUCTION

This chapter describes the intent of the Dissertation. It reveals background information and
provides a problem statement to enable a full understanding of the issues involved.
Thereafter, it explains the aims, objectives and the hypothesis of the Dissertation.

1.1 Purpose of the Dissertation

The purpose of this Dissertation is to gain knowledge and insights that would contribute to
further developing and improving various aspects of Project Management in the UAE. The
Dissertation is designed to obtain more information and conduct further research in order to
assess the impact of Procurement Strategy on Business and Project Strategies with respect to
management of Oil & Gas projects.

1.2 Background Information

UAE is rapidly developing and hundreds of varied projects are on-going. These projects
involve all sectors, whether public or private (i.e. Construction, Telecommunications, Real
Estate, Transportation, Environment, Oil & Gas, etc.). In fact, these projects have been
launched to incrementally achieve the objectives they are intended for and are to a great
extent in conformity with the strategic direction of organisations or UAE Government
directives to develop the country. Local as well as International companies are participating
in the development of this country. Consultants and Contractors from all over the world are
being invited to share their expertise in these Projects.

The main reason for inviting International expertise is lack of resources and specialization in
the region to undertake a huge number of projects of varying complexity. Attracting these
specialists has of course contributed to raising the knowledge and resource base of local
companies in addition to improving proficiency in handling projects. Therefore, Project
Management in this region needs to focus more on developing/implementing Strategies
which promote good relationships with International Contractors/Consultants. This is in order
to retain the interest of these firms locally with a view to improving quality and achieving
project objectives. Formulating procurement and contracting strategies and suitably awarding
a project on the basis of techno/commercial considerations is a strategic Management
decision to obtain optimum, cost-effective, world-wide professional services and expertise.

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In order to gain maximum benefits, “It is important that a proper business control by owner /
company is in place, to ensure that effective control of the contract process and its associated
risk can be managed smoothly” (Rashid, 2006). This is the reason, he explained, why Project
Procurement is considered as a major element in the management of any project.

It is accepted that Oil & Gas is one of the major UAE industries contributing to the
development of this country. Oil & Gas projects are mostly of high specialisations that
demand the expertise and professional services mentioned. Oil & Gas projects are generally
similar to most Construction projects where Conceptual Study, Feasibility Study, Design,
Procurement and Construction phases are involved for a big sized (Major) project; however,
these phases might be slightly differently placed or named (Annexure 1 details the various
phases of a Major Oil & Gas Project).

Similar to Construction projects, Oil & Gas Major Projects have specific objectives to meet
overall business and strategic objectives. Specific project objectives of meeting its schedule,
quality and cost effectiveness may be associated more with Corporate / Business objectives
such as; increasing Oil & Gas production to meet international market demand, enhancing Oil
& Gas processing and operations, ensuring reliability of process units/equipments and ensuring
safety and protection of the environment. Other broader Strategic objectives to be met may be
furthering the growth of the company and more publicly, development of UAE economy.

1.3 Problem Statement

It is sometimes alleged that the Oil & Gas industry fails to achieve many aspects of its overall
strategic business objectives because of problems occurring in the projects it undertakes.
These problems can be categorised as either not completing projects within a set schedule, at
the quality level required or around the budget allocated. Another problem associated with
Oil & Gas projects could be finding capable Contractors/Consultants, improper tendering
competition (i.e. different levels of contractors/consultants’ proficiencies, capabilities and
sizes in one tender).

Furthermore, a very persistent problem that figures in almost all projects is the reluctance of
Contractors/Consultants to accept Contracting Strategies specific to the Oil & Gas industry
projects which can include, but not be limited to, the following:

 Procurement Methods selected and Procedures for the Project.

 Terms, Conditions and Legal obligations in the contract for the Project.

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 Payment Terms and methodology proposed.
 Risks Allocated for the Project.
 Mechanisms in dealing with Claims, Delays, Disputes and Penalties in the Project.
 Client’s lengthy procedures and uncooperative interference in the project.

In the opinion of Turner (1995), the “Concept of establishing the terms of a contract by
‘reciprocal concession and compromise’ is an effective generality. However, it is difficult to
achieve in reality because one party is more powerful than the other.” It was further explained
that this might be the case in circumstances that involve Contracts between “Big Oil”
commercial muscle and small specialized contractors. Formulation of Procurement Strategies
in Oil & Gas requires high-level strategic management involvement to maximise gains and
optimise project deliverables. Hence, Management of Projects in the Oil & Gas industry
needs to effectively utilise many advanced Project Procurement strategies and practices.

Rashid (2006) explains that the impact of Procurement and Contracting Strategies on the
scope, execution and completion of projects drastically affects relationship between Owner
and Contractor in terms of coordination, cooperation, communication, scope management
and cost/risk associated. Thus, Procurement Strategies and processes in Oil & Gas sector
need to be more attuned to completing the project to its and strategic objectives.

1.4 Aim, Objectives and Hypothesis of the Research

This section is intended to explain the aim, objectives and hypothesis of the research.

1.4.1 Aim of the Research

The general aim of the research is detecting the link between Project and Business Strategies
in Oil & Gas industry. It is intended to propose Procurement Strategy as the missing link that
solves perceived problems in Oil & Gas projects, as hypothesis to the research to be tested.

1.4.2 Objectives of the Research

The Objectives of the research hence derived from the above Aim are:

1. To investigate the influence of Procurement Strategy on Projects and Business

Strategies and the relationships between these Strategies.

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 2. To show how current Procurement Strategy in Oil & Gas industry causes difficulties in
achieving objectives of the Project that are inline to Business objectives and how an
effective Procurement Strategy could solve these problems.

3. To investigate the ideal composition of an effective Procurement Strategy and prescribe

advanced Procurement Strategies that Oil & Gas industry should implement.

4. To develop a model of linking Procurement Strategy to Business Strategy in Oil & Gas.

1.4.3 Hypothesis of the Research

The assumptions made in order to arrive at the Hypothesis of the research are as follows:
Business Strategy decides on Projects to fulfil the strategic business needs through Portfolio
and Program Management. Project Management handles initiation and execution of a Project.
Project Strategy decides on Projects, whether out-sourced or in-house, which enables the
Project to achieve its objectives through Portfolio/Program Management. For an outsourced
Project, a Procurement Strategy is set to complete the Project in the manner desired.
Procurement Strategy specifies how the two parties should proceed to successfully complete
the Project, by achieving its objectives in consonance with the overall Business Strategies and
goals of the company. Hence, the Hypothesis to the research is:

The ability of any Oil & Gas Project to successfully meet its objectives in accordance
with the prescribed strategic objectives is dependent on linking that Project’s
Procurement Strategy to the Corporate / Business Strategy of the Company.

The Hypothesis model is illustrated in Figure 1 showing the link and the loop of the
Strategies. It is intended to test this hypothesis for acceptance through Literature Review and
specific Research Methodologies adopted for the purpose.

In-House
Program & Portfolio Management Project Management Projects
Business Strategy

Projects Project Strategy

Out-Sourced
Procurement Strategy
Projects

Procurement Management

As the discussion progresses and gets influenced by Literature and research, modified and
final models of Procurement Strategy will given.

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1.5 Description of Research Contents

The scope of this Dissertation is:

 To give a General Introduction, as shown above, stating the background information
to the Dissertation, problem statement, aims, objectives and hypothesis.
 To conduct a Literature review on how similar or related issues, challenges and
problems have been tackled and documented in the field.
 To conduct and adopt proper research methodologies to display the detailed results of
the responses elicited through this research and data obtained thereby. Both
quantitative and qualitative methods are used.
 To analyze the data gathered from the research and discuss findings gleaned from
Literature and collected through research.
 To provide recommendations and offer corrective solutions that could contribute to
the development of a more effective Procurement Strategy in view of objectives and
hypothesis.
 Finally, to give a conclusion of this Dissertation and suggest a subject for further
research.

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 Chapter 2

2. Corporate & Business Strategy and the Link to Project Strategy

This section is intended to review the Literature for issues related to Corporate Business and
Project Strategies to see the links and relationships. Industries from Building, Construction
and IT were consulted to provide the necessary information on the subject.
First, the concept of each Strategy is explored; then, the links to Business Strategy are seen.

2.1 Overall Corporate and Business Strategy

Overall Strategy of an Organisation is defined as “Matching the resources and activities of an

organisation to the environment in which it operates”, (Johnson and Scholes, 1999).
It was added that Strategy is likely to be concerned with the long term direction of the
organisation.

Hence, Strategy is the direction and scope of an organisation over the long term which
achieves advantage for the organisation through its configuration of resources within a
changing environment to fulfil stakeholder expectations. It was explained that Strategy differs
with organisations' sizes. For a huge multinational organisation, Overall Strategy is the ability
to achieve a position to becoming the ‘industry standard’ recognized by suppliers and buyers.
Furthermore, Organisation Strategy is divided into two levels: Corporate level Strategy and
Business level Strategy.

Corporate Strategy is the consistency in development in terms of: clarity of the rationale of
the corporate parent in seeking to add value to business units; the logic of the corporate
portfolio; the nature and the extent of the diversity of the portfolio and the nature of corporate
control exercised by the corporate parent.

A Strategic choice in Business level Strategy needs to take into account the environment in
which the organisation operates like competitive advantage maybe eroded as technology
changes or as new competitors emerge.
Hence, Business level Strategy is about how to compete successfully in a particular market.

The long term direction of an Organisation is stated through expressing the Mission, Vision
and Objectives of the Business for an organisation.

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Merwe (2001) stated that the strategy making and strategy implementing process in business
development is thought to consist of five interrelated managerial tasks:
1. Deciding what business the company will be in, and forming a strategic vision of
where the organisation needs to be going, infusing the organisation with a sense of
purpose, while providing a long-term direction and establishing a clear mission.
2. Converting the strategic vision and mission into measurable objectives and
performance targets.
3. Crafting a strategy to achieve the desired end results.
4. Implementing and executing the chosen strategy.
5. Evaluating performance, while reviewing new developments that could lead to
initiating corrective adjustments in the long-term direction, in light of actual
experience, incorporating changing conditions, new ideas, and new opportunities.

It was further discussed in details that strategic management process is about moving the
organisation from its present position, to a future strategic position, in order to exploit new
products and markets. In general, Modern Business Strategy deals with the matching of
activities of an organisation to the environment in which it operates. Strategic Management
is that set of managerial decisions that determines the long-term performance of a company.
It includes strategy analysis, strategy implementation, evaluation and control.

Strategic analysis process investigates current and future positions. Strategic implementation
is the way of getting the organisation to move swiftly and surely. Study of strategic
management therefore emphasises monitoring and evaluating the environmental opportunities
and threats in light of corporate strengths and weaknesses. The strategic objective setting process
is designed to make the program more fruitful.

Further, it was discussed that strategic decisions may also have to manage and perhaps
change relationships and networks outside the organisation, for example with suppliers,
distributors, customers and services providers.

The concerns are what new opportunities can be identified or created, which products or services
should be developed and the extent to which these meet stakeholders’ requirements or the
objectives of the organisation. The aim is meeting these strategic objectives regardless as
objectives vary from one organisation to another.

Organisations therefore select various projects to properly achieve these strategic objectives.

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2.2 Project Strategy:

As explained earlier, organisations choose on projects to achieve strategic objectives. “The

project is part of the strategy by which the parent organisation achieves its development
objectives”, (Turner, 1999). Further, Projects themselves carry their own objectives. Since
projects are chosen to achieve overall objectives, their objectives shall be inline with the
overall objectives. The project’s objectives are set by the Project Strategy. Hence, Project
Strategy aims at placing the project to meet overall Business objectives. Morris (1994)
defined Project Strategy as achieving project specific objectives to obtain the overall business
objectives responding to internal and external environment in which the project exists.
Project Strategy includes:
- Clear identification of stakeholders requirements;
- Statements on how these are to be achieved;
- Environmental issues, quality and safety issues;
- Owner's roles with the parties;
- Financial strategy;
- Milestones and schedule;
- Technical policy and strategy;
- Risk management strategy;
- Procurement and contracting strategy;
- Logistics policy;
- Employment strategy;
- Information technology strategy; and
- Communication policy.

The above parts formulate the projects objectives along with requirements in existing
environment which should also be inline with strategic objectives. Hence, Project’s Strategy
should be aligned to overall Business strategy. Investigating the relationship and drawing the
link of these strategies are shown from Literature in the next section.

2.3 The Link to Overall Business Strategy through Program / Portfolio Management

Project Strategy is linked to Business Strategy through Program / Portfolio Management. It is

to be seen how Program Management and Portfolio Management separately and jointly link
Project Strategy to Business Strategy. Program Management is defined as “the coordinated
management of interdependent projects over a finite period of time in order to achieve a set
of company’s strategic objectives and desired business results”, (Matinelli and Waddel,

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2004). In high-technology industries such as aerospace or automotive, program management
is a critical business function that provides means by which new products are conceived,
developed and brought to market in order to achieve a major share in the profit.

In addition, outside these core industries, program management is not well understood and
there is much confusion between the disciplines of program and project management.

Program and Project Management are related but distinct disciplines. It is important for
everyone within the organization to fully understand the distinctions between the two, as well
as the various roles and responsibilities of program and project managers.

The greatest difference between Program and Project Management is that Program
Management focuses on achieving business results to create a competitive advantage while
Project Management focuses on planning and executing the work required to deliver the end product.

In the Program Management model, the program manager manages across the multiple
functional projects, while the project manager manages within a single functional project.
Other distinctions between program and project management are shown in Table 1.

Table 1 Comparison between Program and Project management, (Martinelli and Waddell, 2004)

It has been discussed that Program Management effectively and successfully fills the skill
gap between Project Strategy and Business Strategy in many organizations and industries.
This is because the discipline brings the requisite skills, abilities and business acumen to
perform this critical strategic role.

Figure 2 (a) and (b), graphically illustrates the identified gap between strategic elements and
project execution which exists in many organizations today.

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 (a) (b)
Figure 2 Link between Portfolio, Program and Project Management to Business Strategy, (Martinelli and Waddell, 2004)

As illustrated in the figure, when the Program Management function is employed, the gap
between strategic elements and project execution is effectively eliminated. Missing parts have
been identified and provided the complete link to Strategy. Figure 3 (a) and (b) illustrates the
closed-loop relationship between Business Strategy, Program, and Project Management in
delivering a product.

(a)

(b)
Figure 3 The strategic relationships in developing product delivery, (Martinelli and Waddell, 2004)

Therefore, Program management is a proven business model used by many organizations to

achieve their business objectives, and is designed to be used strategically by Business Management.
Although all projects and programs deliver tactical and operational deliverables, the real power
of program management is the ability to link similarly aligned projects into programs that are
tied to business strategy of the organization. Figure 4 illustrates their link to business strategy.

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Figure 4 The Link to Business Strategy through Program Management, (Martinelli and Waddell, 2004)

On the other hand, originating and correctly prioritizing programs of projects are Portfolio
Management activities. Michael & Manon (2007) in their discussion of project based
organisations (PBOs), linked Project Management to Business Strategy through Portfolio
Management which manages the programs. It is discussed that PBOs need to adopt integrative
approaches that will enable consistent structures and delivery of strategy. A research was
conducted to investigate and understand the double loop effect of strategy, governance and
structure on project management and vice versa. Then, through the research, it is suggested that
it is generally recognized that PBOs are struggling to integrate knowledge and structures and
that projects are often viewed as “singular ventures”.

Studies done in strategy implementation have demonstrated that strategies are seldom
implemented as planned. Strategy analysis, formulation and implementation are not a linear
process, but the three activities are going on concurrently all the time and strategies are
therefore formed incrementally. If programs and projects are used to implement strategies in
relatively unstable environments, PBOs are expected to be designed to cope with emergence
and enactment. A recommendation was laid out allowing great autonomy to program managers,
who would have responsibility for the business level strategy and displaying value chain
principles of cooperation and collaboration between the stakeholders of a program.

Portfolio Management is an approach that aims to align projects efforts through programs
with the corporate strategy and optimise the efficient use of resources throughout the
organisation. Portfolio management is a management approach for PBOs; its objective is to
guarantee efficient use of resources in support of the corporate strategy by managing
Programs of multi projects. Figure 5 (a) and (b) illustrates the above discussion.

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 (a)

(b)
Figure 5 The Business Strategy through Portfolio and Program Management, (Michel and Manon , 2007)

Figure 5 (a) shows the top down structure they developed from Top Management to Projects
showing levels of Portfolio, Programs and Projects to the Strategy.

Figure 5 (b) shows the value creation and value delivery out of projects to the Business and
Corporate Strategies through vertical integration of Portfolio Management and the Horizontal
integration of Program Management.

Gareis (2000) referred to PBO’s as Project-Oriented Organisations (POO’s), and discussed

the essence of Program and Portfolio management in achieving Strategic goals.
It is discussed that a POO is characterised as a company which:
- defines “Management by Projects” as an organizational strategy,
- applies temporary organizations for the performance of complex processes,
- manages a project portfolio of different project types,
- has specific permanent organizations to provide integrative functions,

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 - applies a “New Management Paradigm”,
- has an explicit project management culture, and
- perceives itself as project-oriented.

It is explained that POO’s hold a portfolio of projects. The more projects a company
performs, the more complex it becomes. In order to cope with this increasing complexity,
new management competences are required.

POO’s are highly complex organizations because of their dynamic boundaries and contexts.
On one side the number and the sizes of the projects and programs are constantly changing,
permanent and temporary resources are employed, and cooperations are organized in virtual
teams. On the other side varying strategic alliances are established and relationships to the
different social environments of the different projects and programs are managed.

In order to manage the dynamics of POO’s besides intensive corporate identity activities,
such as strategic planning activities, reflections of the corporate culture, and continuous
organizational development, specific integrative functions, such as program management and
managing the project portfolio, have to be performed.

Program management and the management of project portfolios, as new management

competences of Project-oriented Companies, require specific management processes and
management methods.

For Program Management, it is explained that:

A program is a temporary organization for the performance of processes of medium and high
complexity, which are closely coupled by common overall objectives.
For the realization of several processes of medium and high complexity a program applies on
the one hand side projects, as differentiation instruments, and on the other hand side a
program office, a program steering group, process owners, etc., as integration structures.

Usually some of the projects in a program are performed sequentially and some are
performed in parallel. Programs have program-specific strategies, organizational rules and
structures.
It was added that typical programs are the development of a product family (and not of a
single product), the implementation of a comprehensive IT-solution (such as SAP), the

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reorganization of a group of companies in a holding structure, and large investments, such as
an oil platform.

Program management has to be performed in addition to the management of the single

projects of a program. It includes the processes of starting, coordinating, controlling and
closing-down a program. The program-management methods are similar to the project
management methods, i.e. there is a program work breakdown structure, a program bar chart,
a program environment analysis, etc.

In order to allow for autonomous projects on one side but to assure the benefits of
organizational learning, economies of scale, and networking synergies in a program on
another side, a specific program organization is required. Typical program roles are program
owner, program manager, and a program coordination team, typical program communication
structures are program owner meetings and meetings of the program coordination team.

The advantages of designing specific program organizations with several subprojects are:
- a less hierarchical organization
- a clear terminology: a program- manager and several project managers instead of one
project manager and „project managers“ of the sub-projects
- empowerment of the projects of the program by allowing for specific project cultures,
specific relationships to environments and specific project organizations
- differentiation between program ownership and different ownerships for the different
projects.

For Portfolio Management, it is discussed that:

For integration purposes a set of projects might be clustered in different ways. Considering
the sequence, in which projects are performed the chain of projects results, by relating a set of
projects to each other according to a specific criterion such as the technology applied or the
region performed for, a network of projects results, and by considering all projects performed
by a company at a given point in time, the project portfolio results.

The basis for the management of the project portfolio is a database with aggregated project
data, such as the project type, relations of a project to other projects, information about the
project organization, information about relevant project environments, and project ratios.
These data can be used for relating projects to each other, for deciding about new projects to
be started, for setting project priorities, and for stopping projects.

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For the management of a project portfolio a specific process and specific methods, such as
the preparation of a project proposal, and project portfolio reporting methods, are required.
Typical project portfolio reporting methods are the bar chart of projects, the projects profit
versus risk graph and the progress chart of projects
The objectives of the project portfolio management process are:
- Optimizing the results of the project portfolio ( and not of the single projects)
- Selection of projects to be started
- Interrupting or stopping projects
- Definition of project priorities
- Coordination of internal and external resources
- Organization of learning of and among projects .

For Project-oriented Companies it is not sufficient to have the competence to manage single
projects efficiently, but additional competences, such as the competences for the assignment
of projects and programs, for project and program coaching and auditing, for networking
between projects, and for program management and project portfolio management are
required. For all of these processes an explicit assessment and continuous further
development is necessary.

Program management used to be a side job for executives, but in today's environment of
change, it is clear that a new approach is needed. In the near future, organizations will rely on
individuals to focus all of their energy on implementing an overarching strategy that pulls
together multiple disciplines within the organization. This new responsibility of program
management is a likely path for both functional managers and project managers.

A program manager’s focus never wavers from the organization’s strategic objective. The
strategic objective is a long-term objective that is essential for the business to achieve in
order to maintain a competitive advantage, for instance, reducing cost, increasing customer
satisfaction by, or increasing revenue. Once the strategic objective is identified, the tactics, in
terms of identifiable projects, must be outlined in order to achieve this objective.

The program manager must sustain the organization’s focus by continuing to identify and
drive the implementation of projects that will ultimately support the strategic objective.
Successful program managers are able to move the organization toward achievement of the
strategic objective in a timely manner without interrupting the day-to-day operations of the
organization.

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In summarizing the strategic role, PMFORUM (2001) stated that organisations need
programs and portfolio management to implement Strategy providing strategic role of each
conception in relation to each other in achieving strategic objectives. Table 4 shows each
conception and relationships in achieving strategic objectives.

Conception Project Program Portfolio

Delivers a single unique Has a portfolio of related Delivers a strategic business

product or service that is projects focused on a objective
tied to delivering business strategic objective. Takes into consideration
value. Identifies projects that will multiple aspects of an
It may be part of a achieve the strategic organization
program focused on a objective. May require changes to the
strategic objective, but It is done at the strategic organization’s structure,
does not stand alone in level; policies, processes,
delivering the end Requires coordinated effort procedures, and technology.
Relationship objective). in terms of risk, resources, It may require the organization
and Strategic Has a defined start and communication, and other to transform itself.
Involvement end date. project management The strategic vision of the
It is usually done at the Processes across multiple organization will drive the
tactical or operational projects and business units; program, and projects will be
level (implementing part May not have a defined identified and prioritized over
of a strategy). start and end date. time to fulfil the strategic
It is s schedule-, activity-, objective.
task-, and resource- These types of programs span
driven. business units and are
generally undertaken at the
corporate level.

Table 2 The Project, Program and Portfolio Management in Strategic Involvement, (PMFORUM, 2001)

During the strategic planning process of an organisation it is recommended that organizations

create a set of strategic objectives to gain competitive advantage and achieve business
growth. Strategic objectives are the results an organization wants to achieve within a
specified strategic horizon. Programs are then developed to create the means to achieve the
objectives. For each program, a program strategy is developed to define how the program will
contribute to the achievement of the strategic objective, and serves as the guiding vision to
align the resulting project work. The Portfolio strategy then guides the behaviour required to
achieve the business results.
The conclusion is that good strategic management practices (strategies) identify what an
organization wants to achieve (strategic objectives) and how these strategies will be achieved
over the strategic time horizon – typically three to five years (Strategy). Companies then start
projects to achieve the strategic objectives.

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When projects are to be taken to achieve these objectives and internal resources are not
enough or capable or handling these projects, Corporate Strategy along with all Strategies of
Program, Portfolio and Project might opt for outsourcing these projects. So, Outsourcing,
become strategic and involve outside parties. Outsourcing Strategy is then to be embedded.

Freytag (2002) stated that when preparing Outsourcing Strategy, a company must take into
account both its own position in the network as well as how the company develops. It is also
necessary for the company to clarify its own strengths and weaknesses, and draw up an
overall mission and strategy for the company in general. However, it was explained that for
companies to live up to its mission and implement its strategy, it must interact actively with
its surroundings. In other words, the company’s mission and strategy must be adapted to the
surroundings, as must the way in which in/out-sourcing takes place. The question of who you
are and what you want can only be seen with the surroundings. This includes the parties as
they part of the surroundings.

The above process introduces a Supply Chain to be managed. Stuart (1997) explained that the
growing dependency on out-sourcing will increase the role and involvement of the Supply
Chain Management (SCM) in the corporate strategy. This is because of the relationship
development brought through the SCM such as strategic supply alliances. The growing
recognition of SCM is through achieving its long overdue position, along with marketing and
operations as key element in corporate strategy.

It was also seen in the review of Corporate and Business Strategy that strategic decisions may
also have to manage and perhaps change relationships and networks outside the organisation,
for example with suppliers, distributors, customers and services providers. This gives further
rise to exploring the SCM strategies.
SCM therefore might be a separate strategic process or a strategic practice which is to be seen
and explored in the next chapter.

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 Chapter 3

3. Supply Chain Management and Introduction to Procurement

This section intends to review the Literature on how Supply Chain Management (SCM)
contributes to Strategic objectives achievement, and introduces Project Procurement.
As mentioned previously, SCM is a discipline to be attained by Organisations in managing
projects for outsourcing these projects to achieve the business objectives. Hence, whenever
outsourcing is involved, SCM comes into picture for strategic position of organisation. Also,
SCM is the strategic management of relationships which will be seen.

3.1 Supply Chain Management and Strategy

Introduction and definition of SCM are given from Literature to understand the concept and
then the strategic role of SCM is explored.

3.1.1 Understanding SCM – Introduction and Definition

SCM seeks to enhance competitive projects by closely integrating the internal functions
within a company and effectively linking them with the external operations of suppliers and
channel members. Elmutti (2002) describes SCM as a network or web that brings the
supplier, distributor and the customer into one cohesive process and shows how each interacts
with the others. Supply Chain Strategy is defined as taking into account coordinating all the
different pieces of the chain as quickly as possible without losing any of the quality or
customer satisfaction while keeping the costs down.

The importance of SCM has risen in outsourced services sector as in the other sectors such as
manufacturing. Ellram et al. (2004), in discussing supply chain of out sourced services,
defined SCM as the management of information, processes, goods and funds from the earliest
supplier to the ultimate customer, including disposal. It was explained that in recent years,
services have become an increasingly important force in the U.S. economy. Services have
taken on an escalating level of importance as manufacturing became hollowed out in the
1980s and 1990s due to outsourcing to Asia, Mexico, South America and Eastern Europe.

Yet, from academic and practical standpoints, the emphasis of supply, supply chain and
operations management is still strongly skewed toward the manufacturing sector. Figure 6
illustrate the discussion of SCM enrolment in the services sectors in the US.

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 Figure 6 Supply Chain in the Services Sector, (Ellram et al., 2004)

Hence, a supply chain framework appropriate for a services supply chain was developed by
comparing and contrasting the applicability of three product-based manufacturing models:
Global Supply Chain Forum Framework, SCOR and Hewlett- Packard’s Supply Chain
Management Model as in Figues 7 a, b and c.

(a)

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 (b)

(c)
Figure 7 a, b & c Supply Chain in the Manufacturing, (Ellram et al., 2004)

It was explained that Services are significant, and the spend is large and growing. Attention
to the services supply chain by practitioners is necessary for improvement, cost control and
minimization of value leakage. Similarly, more attention to the services supply chain is
needed by academics as they educate future practitioners and conduct research.
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Disseminating information on best practices and trends in managing the services supply
chain and services purchases could help businesses retain their competitive advantage in the
growing global economy. Improved management of services spending could represent the
next major area of cost reduction and value enhancement for organizations. Supply
management academics and practitioners can play a significant role in this improvement
strategy.

Hence, SCM should suggest models and ways for the supply management executives to
understand and implement. Lan (2003) suggested an Integrated Supply Chain Management
(ISCM) that directly involves linking suppliers and customers with internal supply processes of
an organisation. The model is illustrated in Figure 8.

Figure 8 ISCM integration Architecture, (Lan, 2003)

It is suggested that ISCM solutions allow organisations to automate workflows concerning the
execution and analysis of planning, sourcing, making, delivering, returns handling and
maintenance.

3.1.2 Strategic Role of Supply Chain Management

In view of strategic involvement, SCM contributes to Strategic position of an organisation.

Ogden et al (2005) stated that SCM becomes more involved in Strategic decisions to identify
supply strategies that lead to significant improvements over the next 5-10 years. Strategies
such as increased integration, information sharing and collaboration among supply members
will have the largest impact on organisations once implemented.

As companies move toward increased global competitiveness, the strategic issues

surrounding supply management increasingly demands the attention of firms. Increasing

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demands for reduced costs, increased quality, improved customer service and continuity of
supply have significantly elevated supply management's stature within organizations.

It was further discussed that strategy is defined as being a discernible pattern over time in a
stream of corporate decisions. The purpose of business- and functional-level strategies is to
develop and sustain competitive advantage.

It was stated that previous research has found that supply management is a strategic function
that has an impact on overall firm performance. As supply management continues its shift
from a passive/tactical function to a strategic/integrative function, its goals, objectives and
strategies need to change as well. However, the strategies that supply management
departments adopt need to both support and complement an organization's overall goals,
objectives and strategies.

Strategic supply management has been empirically linked to firm performance through
measures of return on investment, profit as a percent of sales, market share and market
position. Additionally, supply management's involvement as a strategic function has been
associated with supplier evaluation and building relationships/partnerships with suppliers,
both of which have resulted in greater corporate financial performance. On the other hand, a
misaligned supply management strategy is a recipe for disaster. Therefore, selecting the
correct supply management strategy becomes crucial to overall competitiveness.

It was explained that SCM assist strategic position of organisations in:

- Globalization
- Supply base optimization
- Collaboration
- Outsourcing
- Integration and partnerships
- Early supplier involvement in new product development
- Supplier development
- and other strategies as a means of reducing cost, increasing quality and enhancing a
firm's overall competitive position.

Hence, SCM supports corporate goals. Petersen et al (2005), in examining collaborative

planning effectiveness and supply chain, stated that many organisations are attempting to
gain competitive advantage through supply chain integration, using some degree of

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collaborative planning between supply chain partners. This calls for greater strategic and
operational cooperation between buyer and supplier firms. It was explained that to realize the
full potential of supply chain management, it is necessary to integrate firms in a supply chain.
Consequently, it was explained that supply management has become more involved in
developing and implementing strategies and enjoys a larger role in formulating corporate
strategies.

This is how SCM contribute to achieving strategic objectives. To keep the link, SCM also
specifies relationship management, organisation culture and organisation change as strategic
objectives. Cheung (2006) confirmed that there are numerous activities that asset owners can
do and undertake to achieve strategic alignment of their objectives to selected supply chain
management strategies. It was noted that successful implementation of relationship
management, client organisation can obviously influence the supply chain culture and
commitment to the goals and objectives of an organisation.

The dimensions have been explored and come to the conclusion that SCM requires strategic
activities from clients as illustrated in Figure 9 below.

Figure 9 The Strategic clients activities of SCM and relationships, (Cheung, 2006)

However, these goals in the supply chain must be explicitly stated in the both the client
policy and the conditions of contract and must be fully understood by all parties for a project.
This builds and improves the organisational relationships to cut costs, increase technological
innovation, increase profitability and productivity, reduce risks, and competitiveness to
successfully complete the project and achieve intended objectives. Then, as can be seen from
the Figure 6, Procurement Strategy is necessary for strategic sourcing.

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Procurement with improving relationships can provide a positive contribution to
sustainability and help to satisfy client and stakeholder interests. It is a sustainable approach
to the industry in terms of people, environment and economics. Clients and
contractors/suppliers can potentially make savings in their operations under a relationship
management regime and specified Procurement method through sharing and exchanging
technical and commercial knowledge of the project. Thus, the true benefits of procurement
can only be achieved if there is a change of culture in the industry – in the client, contractor
and supply chain sectors. Sustainable supply chain requires proactive Procurement,
relationship management and the development of an appropriate organisational change.

The connection therefore between SCM and Procurement is that SCM brings the
arrangements in Procurement such as Partnering, Alliances and the integration. Khalfan
(2005) explains that one of the key elements in innovative procurement methods is the
management of the supply chain. Further, a number of organisations and individuals within
the construction industry are already moving towards supply chain integration through the
use of partnering, framework agreements and techniques to rationalise their supplier base.

Innovative procurement methods are often considered as a tool to integrate the construction
supply chain because it provides:
- openness,
- trust,
- cooperation,
- harmony of decisions,
- sharing of benefits,
- intangible and long term investments,
- collective working routine,
- and fair allocation of risk.

Many organisations have taken up the challenge to introduce new procurement initiatives
such as partnering into their organisations. Supply chain specifies how to make partnering
and other methods successful, how to appoint suppliers, how to manage the integrated supply
chain, how to build trust and who will lead the whole process. It further added that SCM
brings the integration in Procurement. This is through the role and power of clients, the
responsibility of contractors, subcontractors, suppliers and manufacturers in the whole chain.
Thus, we can see that SCM in the context of projects involves Procurement in managing
relationships and delivery methods. SCM Strategy is the successful implementation of

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Procurement systems within projects. This helps to successfully complete the project and
achieve intended objectives.
Hence, SCM was seen to be connected to Corporate / Business Strategy for Outsourcing and
to Procurement for strategic relationship management such as Alliances and Partnering.
Procurement Management and Strategy are then to be explored.

3.2 Introducing Project Procurement Strategy

Many practitioners nowadays confuse the term Procurement with either Contracts or
Purchasing. Procurement is however a wider term that should include both in terms of
supplying goods and services to the wide areas of projects management. Dulaimi (2006)
provided two definitions of Procurement:
 Procurement as a strategy to satisfy client’s development and/or operational needs
with respect to the provision of constructed facilities for a discrete life cycle, (CIB
W92).
 Procurement as the organisational structure adopted by the client for the
implementation, and at times eventual operation, of a project, (Masterman, 2002)

The above definitions introduce a Procurement Strategy. Koolwiji and Vrijhoef (2005)
defined Procurement Strategy as the achievement of joint benefit through a collective process
of progressive development of value and costs; and thus added value to Clients and profits for
supplying parties that can be achieved through Procurement methods and arrangements such
as alliance contracting to achieve goals of the parties.

Procurement Strategy for projects is also a mean of identifying and selecting the best options
for applying contracting management and assessing risks strategies and transfer. APM (1998)
defined Procurement Strategy as a way in which suppliers of goods and services are used to
suit the objectives and nature of a project and the Client. It may be dictated by law,
government policy, financial bodies and specific organisation procedures and should further
include a Contract Strategy that forms an agreement on the objectives, priorities and risks of
the project plus attention to how these may change during the work to be done.

As mentioned, Procurement is a wider concept than managing purchases or contracts.

Procurement Strategy assists in improving relationships, achieving projects and Business
objectives. Morledge et al. (2006) argued that Procurement Strategy not only creates a
unique set of social relationship but also forms a power structure within a coalition of

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competing or co-operating interest groups. It was reported that it had been possible to reduce
cost by 5% through selection of the most appropriate procurement methodology. Failure to
select an appropriate procurement approach is well recognised as a primary cause of project
failure. Project success was further defined. It was stated that for some construction
professionals Project overall success is a comprehensive assessment arising out of a
consensus of all key stakeholders. However, this is far to complex and others believe that a
client satisfactory with the final outcomes is perhaps the most appropriate indicator of
project’s success.

If the key objectives to be isolated, there is evidence that the selection of an appropriate
procurement strategy which matches the objectives of the key stakeholders is an important
contributor to project overall success. An appropriate Procurement Strategy should be
developed and set at an early stage of a project and adopted throughout the project.

Procurement Strategy is also specifies risks management. H.M Treasury (1997) stated that
setting a Procurement Strategy should select the best option in assessing alternative risk
transfer strategies after identifying risks in Design and Build, client design and management
contracting. A more in depth study of the Procurement Strategic objectives and processes are
undertaken in the next chapter.

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 Chapter 4

4. Project Procurement Strategies and Processes

In the previous chapter, it was seen how Procurement falls form SCM. Procurement
Management and Procurement Strategy were defined. As also seen earlier, the essence of
strategy is the way a company defines its business and links together the resources such as
relationships, organization’s competencies and suppliers and contractors which really matter
in today's economy. Procurement Strategy in the Supply Chain contributes to such a way.
Thus Procurement strategies are further to be explored in details.

4.1 Procurement Strategies

To see the wide range of Procurement, Procurement Strategies around the world can be
investigated. Morledge et al. (2006) stated that there are procurement strategies that achieve:
 Certainty of cost and time for a design developed by architect employed by client but
this traditional procurement process is sequential and consequently low
 Relative speed and cost certainty – but the design will be a greater or lesser extent the
responsibility of a contractor (develop and construct or design and build respectively)
 Speedy completion for a design developed by an architect employed by the client
(either management contracting or construction management) – but this case cost is
uncertain until close to completion).

Then, that most appropriate selection of a Procurement Strategy has two components:
 Analysis – assessing and setting the priorities of the project objectives and client
attitude to risk
 Choice – considering possible options, evaluating them and selecting the appropriate.

Oyegoke (2001) provided a framework for comparing construction management contracts in

the UK, US and Japan by reviewing previous studies on construction practices prevailing
there and exploring the main procurement delivery methods. An examination was undertaken
for construction management contracting types, processes and procedures and interaction
between the construction manager and other stakeholders. A careful analysis was undertaken
of the Contracts Management systems within each practice and between both practices; the
distribution of responsibilities and risks both in pre-construction and during the construction
stages; and allocation of responsibility or alike.

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It was explained that practices amongst US, UK and in Japan can be differentiated and is
obvious in user’s requirement, project finance, internal construction process, and feedback
and learning information. The differences between the contracting systems lie in the
contractual ties and assignment of responsibilities of the parties, the contracts within the
system, and their performance requirements. Finally, the importance of having clear divisions
of scope from owners regardless of differences in systems was highlighted.

For international comparisons, Xiao and Proverbs (2002) advised that international
comparisons of contract allow contractors in different countries to distinguish their own
strengths and weaknesses and improve their competitiveness accordingly. On a recent survey
of contractors in Japan, the UK and the US have evaluated and compared contractor time
performance. It was disclosed that Japanese contractors achieve shorter construction times
and higher levels of time certainty than their UK and US counterparts. Anticipated delays are
far shorter in Japan and levels of client satisfaction are significantly higher than in the US and
UK. The superior performance of Japanese contractors may be attributed to their working
practices which were characterized by the use of a larger workforce on site, detailed planning,
close working relationships with their subcontractors, and an overriding focus on time
certainty.

Focusing on Procurement selection, in Hong Kong for example, Cheung et al (2001) stated
that one of the key concerns of Procurement selection is how to enhance objectivity. A
method was selected using Multi-Attribute Utility Technology (MAUT) and the Analytical
Hierarchy Process (AHP).

In MAUT, utility factors corresponding to various procurement strategies can be assigned by

experts to create a utility factor table. For the purpose of catering for individual project
characteristics, the relative importance weightings of the selection criteria can be assessed
using the analytical hierarchy process. Final selection can be then based on the highest utility
value derived from the procurement strategies, taking into account the relative importance of
the selection criteria.

Thus, Procurement for projects should also aim at achieving value to organisations. In U.K.
for example, H.M (1997) stated that procurement in construction is to achieve the best value
for money and accountability for public funds must not be used as an excuse for missing
opportunity to deliver this. The key features of achieving the best value for money in
construction procurement are:

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  Integrating value and risk management techniques within project management;
 Defining the project carefully to meet user needs;
 Not appointing consultants and contractors on the basis of lowest initial price alone.

Procurement Strategies around the world can thus be said to be quite varied. Some strategies
might be familiar and others are totally new.

APM (1998) specified the contents of projects’ Procurement Strategy that achieves objectives
and affects Strategic decisions, which are:

1. Priorities of the project to employ other organisations to supply good and services and the
availability and suitability of Clients resources.
2. The suitability, capability and selection of suppliers and/or contractors.
3. The responsibility matrix including defining requirements, scope of work, standards,
design, quality, fitness for purpose, supervision, operating and maintenance, health and
safety, approvals, schedules, equipment installation, inspection, testing and commissioning.
4. Terms and Motivation Of Payments
5. Commercial and Procurement Procedures.
6. Contract Formation and Management
7. Risks allocation, Changes, Variations and Claims Management.

The resulting Procurement Strategy should respond to all the above elements. This can be
seen in details in the next sections.

4.2 Strategic Project Delivery Methods and Procurement Systems

As a Strategic objective, the right Delivery method and Procurement system should be selected
in every project. Literature proposed many developed Procurement methods for projects
compared to Traditional procurement methods which result in problems.

4.2.1 Project Delivery Methods

One method proposed in Literature is Alliances; Stuart (1997) explained that Alliancing is a
key element in corporate strategy in the discussion of Supply Chain Strategy’s organisational
influence. It is proposed that Alliance practising firms will display an increase in involvement
and management support in the corporate strategic-making process. Alliancing practising

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firms should experience increased benefits (productivity, quality and ultimately competitive
advantage) which serve to reinforce and improve SCM strategic posture. A common element
of an Alliance is the emphasis on joint problem-solving because of the need for cooperation,
trust and information sharing to affect such an approach.

Other procurement methods in projects are the Design and Build (DB) and Partnering
methods. Koskela (2003) looked at renewal of construction suggesting D/B and Partnering
for projects’ procurement methods. It is explained that separation of design and building has
presented problems in construction.

Thus, it is no wonder that great expectations have been attached to D/B procurement of
construction projects, where these two stages are organisationally integrated from the outset.
In this case, the client gives a single contract for the execution of both design and
construction to one company (usually a contractor). The performance of the D/B delivery
system in comparison with other major delivery systems has been studied and the results
indicate that, statistically, D/B outperforms the Traditional process in several respects;
however, the differences are not great.

On the basis of statistical analysis, the construction speed of D/B is 12% faster than the
speed of Traditional methods and the total delivery speed is 30–33% faster. In the UK, the
share of projects ending up above budget by more than 5% was 21% in D/B projects in
contrast to 32% in traditionally procured projects. In the USA, the corresponding figures
were 38 and 51%. The diffusion of D/B has been relatively rapid and several variants have
evolved in the speedy process of the procurement method of Partnering. It is mentioned that
Partnering is used mostly in USA and UK primarily to improve relationships and cooperation
in all project management levels. It achieved superior results in controlling costs and
technical performance and in satisfying customers compared with other projects.

A further explanation revealed that a US study shows that there appear to be no correlation
between the use of alliances and project resulting in long-term contractual relationships
between owners and contractors which are intended to promote efficiency in capital projects.
In addition it is not the alliances but the substance of work processes that produces the result
but the problem of Partnering is visible when the long term trust for improvement is not
achieved so there is evidence of improving long term relationship and trust.

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Chritamara et al (2001) also suggested the D/B method that allows the client to introduce the
contractor’s design at any stage resulting in the possibility of having different levels of initial
scope establishment. It was suggested that the client’s main criteria for selecting D/B
procurement are to reduce the time and cost of projects through one point responsibility. An
analysis of the experiment with the model developed shows that D/B fast-track construction
with fixed design and construction schedule is most effective in saving time, whereas
organisations use Traditional method separating the two D/B phases for cost savings.

As advancing the method, it was further explained that D/B method handed over to the D/B
contractor is employed through System Dynamics Modelling (SDM). There are many
categories for SDM. However, they can be classified under six main categories as: (1)
traditional design and build, (2) package deal (including turnkey contracts), (3) design and
manage, (4) design manage and construct, (5) novation design and build; and (6) develop and
construct. Turner (1995) classified the D/B approach into four main categories: (1) package
deal; (2) turnkey; (3) all-in service; and (4) develop & construct. Figure 10 illustrates the
categories.

Figure 10 SDM of Project Procurement Selection Method, (Chritamara et al., 2001)

A cause problem was identified as the lack of clarity in the amount of design left to be
performed by the construction contractor is in Traditional procurement methods. It is
observed that much control of Design by the contractor means that cost benefits of
buildability and integration of programs of design and construction in D/B methods. Also,
there may be significant delay or cost overrun due to unclear scope from the client in the
Traditional methods. Splitting The D/B phases causes loss of control of design by the

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contractor which means that the cost benefits of buildability and integration of programs of
design and construction are lost.

Further, in D/B construction projects, there are two main parties responsible for the execution
of the project, the client and the contractor or a group of contractors. In theory, the client
assigns all responsibility to the contractor. The client's role is to respond by identifying
requirements and by inspecting how well the product accords to the specification. However,
in practice, the contractor may be assigned to the contract with varying levels of information.
The contractor may start working on the project from the conceptual design or may start the
project with almost complete design from the client. Further they introduce the importance of
Information management in such procurement method. They say that Construction
knowledge and information sharing between client and contractor are essential for project
success.

Dulaimi et al (2003) further mentioned that the D/B method in suggesting enhancing
integration and innovation for Singapore’s construction industry. It was stressed out that one
of the major causes of low productivity is lack of integration across the value chain. A
recommendation of two key changes and initiatives to encourage greater integration in
Singapore’s construction industry was emphasized. The first is the promotion of the D/B
procurement method through providing an environment for the D/B arrangement. The second
is for the client to play a catalytic role by embracing D/B and tendering methods that
emphasize greater integration across the value chain. Their emphasis on innovation that
requires initiatives from professional companies to enhance productivity and therefore the
image of industry resulted in adaptation of new procurement methods. These procurement
methods improve the ability of the industry to provide more integrated and innovative
solutions to customer needs and expectations.

D/B is conclusion is proven to be the strategic most effective procurement method in

construction to meet project objectives. El – Sayegh (200) studied evaluating different
procurement methods in construction and concluded that the study results indicated that D/B
methods are more effective in meeting most project objectives followed by construction
management at risk, construction management and lastly the traditional design-bid-build.
Design-build is relatively more effective in ensuring the shortest project duration than
Construction Management methods. The traditional delivery methods are not effective in
ensuring the shortest duration. Construction management method is the most effective in
ensuring staying within budget. The results also show that the Design-Bid-Build methods

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provide the greatest flexibility to incorporate changes during the design and construction of
the project. However, this may come at a higher cost. Design-Build is better suited to handle
changes and ensuring the highest quality. The organizations with limited experience required
a delivery method that included a construction professional to be present at the early phases.

Design-Build methods do not allow a high level of involvement by the owner. Using
Alternative delivery methods and minimizing the number of contracting parties help
minimizing adversarial relationships. With regards to project characteristics, design-build
method is more effective than construction management at risk, construction management
and design-bid-build (in that order) in handling essential, complex and unfamiliar projects.
Selecting the appropriate project delivery method is a key decision that has to be made in the
early phases of the project. There are many delivery methods that can be used on any project.

The decision is usually based on certain factors of importance to the owner. Owners are
usually tempted to use the delivery method that they are familiar with. However, this might be
a great mistake since familiar methods are not necessarily effective in all situations. The
effectiveness of the delivery methods vary according to the factors. Owners must rank their
objectives and choose the method that maximizes the effectiveness in achieving the project
objectives.

4.2.2 Project Procurement Systems

Procurement systems also aim at achieving business and project objectives. Seely (1997)
discussed measurement of Project Procurement Management (PPM) in the Public Sector in
Canada. It is stated that PPM plays a determining role in achieving the projects’ objectives
and should form an integral part to the project management process. It was argued that such
systems are required to monitor and control the time of delivery on the project. Without such
systems stakeholders of a project will wait longer time on procurement. It is not acceptable to
project stakeholders to wait five to ten years from the start of major project procurement.

Finally stating the measures of PPM, it is explained that the approach addresses both the
requirements for corporate accountability and the normative of the PPM function. The
solution to the insight that project stakeholders do not have on their investment into project
procurement is to initiate the PPM measurement.

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However, the right procurement system should be chosen to ensure the achievement of
objectives. Morledge et al. (2006) provided procurement systems that achieve strategic
development in organisations. These procurement systems are identified as Privately financed
public sector projects (PFI), Public private partnerships (PPP), Performance Information
Procurement System (PIPS) and some other systems like US systems (Design and Build and
Low-bid-award), the French System and Chinese approach.

It was explained that a system that benefits both the client and contractor should adopted and
implemented. This is argued to been seen most in the PIPS system which its core duty is to
update and maintain the contractor’s performance information and in price based
environment.

PIPS is a system developed by Dean T. Kashawagi, Director of the performance based

studies Research Group (PBSRG) at Arizona state University (ASU). It is an information
based procurement system that uses best value selection and performance contracting
approach. It is developed for US construction markets but was able to be used in UK markets.
The objectives of the system are to be seen in the next section. It was explained that through
PIPS:
 98% customer satisfaction has been achieved.
 There are no contractor-generated cost increase change orders.
 Projects are completed on or before contract time
 It can reduce the client’s construction management and inspection role by 80 %.

These systems are of general purposes that serve general organisations strategic objectives.
There are procurement systems that are closely applied to projects objectives. Kumaraswamy
(2006) provides the full project procurement system and its subsystems that can be selected in
a project.

Figure 11 shows the breakdown of a Procurement System into its subsystem. Figure 10
shows a template for assembling a project specific procurement system from various set of
options. The figure also shows the sub-sub-system of a subsystem indicating a break down of
a subsystem. It is explained that each subsystem has series of options.

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 (a)

(b)

Figure 11 Project Procurement System and Sub-Systems, (Kumaraswamy, 2006)

We can see from figure that the structure gives full system of a project procurement including
also contractual systems and selection methodologies for contractors and consultants. Hence
procurement systems are also specifies contractor / consultants selection criteria. It is
assumed that no change to current Contractor Selection / Evaluation practices will be
undertaken without a Procurement proper method. The importance of Contractor selection
and evaluation is to be seen.

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4.3 Strategic Criteria for Contractors Selection and Evaluation

Contractor Selection and Evaluation Criteria is another Strategic objective specified by

Procurement for Projects. As seen before Morledge et al. (2006) provided the PIPS system
which its core duty is to update and maintain the contractor’s performance information and in
price based environment. The objectives of PIPS in selecting a contractor are:
 Selecting the best value contractor who can minimize the construction risk of the
client.
 Assisting the best value contractor to minimise his or her risk of non performance
 Ensuring that the contractor uses the best practices principle of reviewing the project
in detail.
 Minimising any misconceptions and potential problems before construction.

The PIPS process is to:

 Force contractors to accept responsibility for their references
 Compel contractors to know and find out about their performance from their
references.
 Transfer the liability of data collection from project manager to the contractor.
 Prevent client bias entering into the past performance numbers.
 Defuse contractor protests and arguments about the inequity of the process.

The important point after all this is choosing the right contractor. Sifri (2003) pointed out that
when penetrating in today’s leaner economy, choosing the right contract vehicle
(Procurement) is as important as choosing the right Contractor. Investigating on how
Procurement Strategy affects Contractors Selection Criteria, Wong et al (2001) explained that
the lowest-price wins philosophy has been a consistent theme of contractor selection over the
years. An investigation showed that a Multi-Criteria Selection (MCS) tender price selection
to comprehensively elucidate the preference and use it in bidder evaluation process. It
provided further insight into the evaluation of contractors’ attributes.

Levels of importance assigned for each criterion were analysed like quantitative analysis of
differences in opinions and variance amongst respondents in a multivariate statistical method.
A contrast was made between the MCS approach and the lowest-price wins option amongst
surveyed construction clients. It was found out that cost has to be tempered with the
evaluation of lowest-price wins and the attempt of construction clients searching for a new

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evaluation paradigm (i.e. adoption of MCS approach rather than basing on the lowest price
wins alone.

Mahdi et al (2002) described a Multiple-Criteria Decision Support System (MCDSS) for the
selection of the most appropriate contractor. Their system can accommodate the unique
characteristics of a project in addition to qualifications and capabilities of those contractors
assessed. It can also evaluate the list of contractors by matching their qualifications with
specific project conditions.

A short list of eligible contractors is thus selected. Furthermore, a comparison was done with
regards to capabilities of the short listed contractors and their plans for the project under
consideration, to select the most appropriate contractor. They said the system can be easily
modified to adopt specific conditions of the proposed project and also to facilitate the
decision maker in explaining the reasons for the elimination of excluded contractor.

Hence, Procurement further enhances the ways in Contractor evaluation and selection Criteria
in Projects moving away from traditional ways. This is seen for Contractors / Consultants
selection. With regard to Contractors / Consultants Evaluation, It is a critical part in achieving
objectives. Simpson et al. (2002) explained that without careful monitoring of suppliers
performance firms are unable to assess whether their suppliers are meeting their needs and
suppliers are unable to respond to unexpressed partner needs.

The issues associated with evaluation of suppliers become problematic since a supplier is
instrumental in providing value to a firm and serving as a source of competitive advantage.
Prahinski and Fan (2007) stated that one tool used to manage suppliers is the supplier
evaluation which communicates the buying organisations’ perceptions of the suppliers’
performance and capabilities. For the buying organisations, supplier evaluation can be used
for supplier selection, supply base reduction decisions, supplier development and
benchmarking. For the suppliers, the supplier evaluation can provide information about the
buying organisation’s perceptions regarding the strengths and weakness of the suppliers’
process and performance.

It was also explained that the buying organisation’s ultimate goal in instituting supplier
evaluations is to improve the supplier’s performance and capabilities to meet the
organisation’s current and future needs. It was further explained that strategic factors such as
the supplier’s flexibility and capabilities, have become more commonly used in the

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performance measurement. This is explained the process might also motivate suppliers to
enhance performance and feel loyalty to maintain long relationship.

With regard to relationships, Vonderembse and Tracey (1999) explains that in manufacturing
to build more effective relationships with suppliers, organisations are using Supplier
Selection criteria to strengthen the selection process and using supplier involvement to
improve decision making and continuous improvement efforts. Procurement in improving
relationships is to be seen.

4.4 Procurement in Improving Relationships of Projects Parties

The relationship between parties is an important part of Procurement Strategy that is more
detailed and shaped as managing contracts. In viewing the Literature for SCM, it was seen
how aspects of managing relationships maintains procurement strategies in projects. Wessels
(2007) stated that organisations have come to realize that they can’t stay in business if they
cannot manage their projects to ensure better products delivery to internal and external
customers effectively and efficiently. Therefore, Procurement improves relationships when
customers and clients are satisfied with services and products.

Procurement is seen as driving a project to success when improving relationships. Kumar

(2007) said that one of the most important aspects that decide the success or failure of any
project is the nature of relationship that develops between the Client and the Contractor. In
office environments which are increasingly becoming paperless, the importance of personal
relationships cannot be over emphasised. Absolutely, there must be an existing mutual
understanding between the clients and contractors. Givers and takers are basically present in a
transaction and each has its role to play. The essential factor is the development of permanent
policies for each Company in dealing with their Clients or Contractors. Company values and
policies should be highly implemented to be able to maintain status.

Parties therefore intend to achieve their own objectives through procurement. Cox and
Ireland (2002) intended to overcome problems and failure to understand the circumstances
that are facing industry players which prevent clients, contractors and suppliers from
achieving their own objectives. The current problems are further compounded by the advice
espoused by government-sponsored industry reports advocating generic approaches. Their
intention was to provide practitioners with a theoretical framework for understanding supply
chains of construction industry. The attributes of buyer and supplier power, the
appropriateness of certain relationships according to the firm’s power position within the

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construction supply chain and the circumstances where the recent industry initiatives and an
integrated supply chain approach may be implemented for success.

Finally in setting a Procurement Strategy, clients should carefully examine their attributes
and contributions to contractors and consultants. Lim et al (2000) made it clear that a Clients’
financial status towards characteristics management competency and construction experience
can have significant effects upon the attainment of project success. A survey proved that
consultants and contractors are aware that client related attributes have influence on the
project outcome. Their data were collected via a mailed questionnaire. Results showed that
all clients related attributes are important and played a major role in the success of every
project.

The predicted five attributes are: 1. client sets down project objectives clearly, 2. client is
credit worthy, 3. client does not contribute to project complexity, 4. client is not litigious, and
5. client trusts project team members. This model provides consultants and contractors with a
tool to evaluate their clients. It was recommended that clients focus on the more important
attributes to ensure project success.

Kadefors (2005) concentrated on causes and effects of fairness perceptions in construction

project relations, mainly fixed price contracts procured by competitive tendering. In such
projects it was uncertain if the results in continuous post contract award problem-solving and
negotiations and fairness concerns may have incremental but significant influence on the terms
of exchange. A case study of client-contractor interaction was used in two projects to discuss
how fair norms are related to strategies and industry culture. There was an intuitive cost-
based norm of fair pricing shapes interaction in construction projects but the consequences vary
between projects. The norm may favour contractors but is also related to poor risk
management and client distrust. In conclusion, therefore to improve performance, clients need
to design procurement practices and communication so that perceptions of contractor losses are
counteracted.

There is an extent of Clients contribution to a project. Chritamara et al (2001) pointed out that
there are two main parties responsible for the execution of the project, the client and the
contractor or a group of contractors. The client assigns all responsibility to the contractor.
The client's role is to respond by identifying requirements and by inspecting how well the
product accords to the specification. The contractor can start project from the conceptual
design or may start the project with almost complete design from the client.

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Hence, to managing relationships and roles of parties, legal implications and contracts
management need to be looked at. Turner (2004) stated that every client should move
towards to increasing relationship with contractors and consultants. On the other hand,
Contract Management should reconsider developing contracts. A contract strategy to
overcome the problems was proposed. There are different types of contracts and risks. These
types of contracts are: Fixed Price, Cost Plus, Reimbursable and Re-measurable contracts. A
further incentive on contracts to improve relationships was emphasized.

4.5 Legal Implications, Contract Management and Strategy

Managing contracts has its relation to improving relationships, understanding of

responsibilities and documentations of agreed principles. Pollington (1999) focused on the
current relationships between post-construction liability, insurance, procurement and the
concept of sustainable development. It is suggested that issues identified as impacting on
procurement are: ethical and human rights, higher environmental standards, eco-design
principles, life cycle implications, performance specification and understanding clients’
cultural values. Alternative procurement strategies will be required to incorporate
sustainability issues to promote the impact of the environment and related matters on the
liability that presents increased risks which commonly resulted in new forms of insurance
coverage for all environmental risks.

Hence, an important process in projects procurement is the management of contracts thant

include all these risks areas. Turner (2004) explained that the purpose of project organization
is to create a cooperative environment. Contracts are the method by which the owner creates
a project organization to employ resources to achieve their development objectives. Contracts
should aim to produce a cooperative organization, aligning the contractors' objectives with
the owners. A three-dimensional vector (reward, risk, safeguard), adapted from the
Transaction Cost Economics Literature, is used to analyse the efficacy of contract types to do
this. It is also explained that Contracts are also unavoidably incomplete. They need to
respond to unforeseen circumstance. A four-dimensional vector (incentive intensity,
adaptiveness, reliance on monitoring and control, reliance on the courts), also from the
Transaction Costs Economics Literature, is used to analyse the governance efficacy of
contract types. The results are used to develop a contract selection strategy, depending on
whether the uncertainty is controlled by the client or the contractor, the project is simple or

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complex, and the uncertainty is in the project's product, method of delivery or both. Hence, it
is important to understand what a Contract is.

A contract is a binding agreement between a project promoter (Owner) and a Project executor
(Contractor) to accomplish execution of a project required. Chen-Wishart (2005) defines a
contract as a promise or an agreement which is enforced or recognized by the law. It is
explained that contracts according to contract law have three elements: Promise, Agreement,
and Recognition by the law. Further, the requirements for enforcing a contract are: Signatures
of parties authorized agents, Method of Dispute Resolution and Applicable Law. Every
contract has terms and conditions.

Terms and conditions of a contract are not included to squeeze the contractor's arm to do the
work as many owners may practice. They are included for clarity on how the work could be
delivered to meet the objectives of the contract for the project. Therefore, conditions of
contract are developed to address the needs and protect the interests of both parties, the
Owner and the Contractor. This is all addressed in Contracts Law and enforcement of a
contract.

4.5.1 Contract Law and enforcement of a Contract

Contracts are made usually by owners on projects and suppliers / contractors accept them
after reviewing its terms and conditions. Every party agrees on the contract would like the
other party to abide the contents. This is assured when the contract is enforced. Bank
guarantees can protect purchasers against works or services performed. However, what
guarantees suppliers and contractors rights of payments and other contractual issues is the
enforcement of the contract. What enforces the contract is the Law. By law, what enforces a
contract and agreement between two parties is when one gives an offer and the other accepts
it. Furthermore, contracts are what contract law applies to although no definition of it exists
in common law.

What is important to understand is that whatever a contract might have that doesn’t contradict
the governing law becomes enforceable to both parties under the law. Habboub (2007)
provided a framework of laws and regulations in relation to Contracts and Procurement with
particular application to UAE and similar jurisdictions.
It is explained that within any jurisdiction, the collection of laws and regulations in relation to
contracts (e.g. Contracts Law) forms part of a legal system. The judicial structure in UAE is

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either Federal or Emirate based. The judicial structure consists of adjudicated processes such
as Litigation, Arbitration and Finance Construction. In UAE, laws in relation to Contracts are
found in more general codes such as “Commercial”, “Civil”, “Joint Venture” and “Civil
procedures” laws. Laws that are in relations to Contracts are referred to as “Contract Law”.
The sources of Contract Law are explained to be:
1. Statute or Codified Laws
2. Common or Case Law (including legal principles derived from Appellate Court
decisions)
3. Civil Legal system (e.g. Civil Courts and Administration of civil procedures)
4. Other recognised legal systems (e.g. Shariah, Tribal, and other regulations by
authorised regulators like ministries and government authorities)
5. International Law (Multinational conventions or treaties)

What is more important to understand is that contract law specifies the enforcement of a
contract. It said that elements of a contract to be enforced are:
- Offer
- Acceptance
- Subject (Legal matter)
- Scope of Contract
- Invitation to treat
- Considerations
- Mutual obligations
- Intention
- Competency (Capability and Capacity of parties)
- Specification of date and venue (in some jurisdictions)

The types of contracts according to Contract Law are:

- Oral / Verbal
- Established practice
- Written
- Letters of Intent (LOI)
- Heads of Agreement (Letter of Acceptance)
- Service Level Agreements (SLA’s)
- Service / Maintenance
- Sales & Products
- Technology

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Finally it was explained that main legal terms and conditions of a contract are:
- Force Majeur : i.e. by saying The employer accepts no liability or non fulfilment of
any terms of any order by a hired caused by force majeur which includes War,
Strikes, Lock outs, Accidents, Fire, Scarcity of Materials or any other cause not
within owners control.
- Liquidated Damages: charges for non fulfilling requirement other than those
specified as Force Majeur.
- Liability: The extend of responsibility in contracts
- Insurance: Objects based responsibility, usually and involvement of third party to
partial of full responsibility.
- Warranty: Time related responsibility and liability.

Addressing Legal implications, Projects Procurement management to understand a contract

and its management is the basis for proper coordination and communication. Mineva (2005)
stated that as companies grow, the volume and complexity of its relationships increase
exponentially. The contracts that describe these relationships have touch points to multiple
functions such as sales, finance and legal. Effective management of these contracts requires a
high level of coordination and deep understanding of the roles of parties.

It is explained that a well known fact is that Companies don’t involve their legal department
in creative business endeavours because they are overwhelmed with tasks such as projects
planning and day to day activities to complete projects. The following are the issues of this
situation:
1. Inability to keep up with contract events such as renewal and expiration dates
2. Inability to find documents and provisions
3. Little or no reuse of work products
4. Lack of leverage during a legal or diligence audit
5. Lack of tools for the efficient review of acquisition targets

Hence, as solutions to above situations is the use of contract management systems that come
from perspectives and different tasks as stated bellow:
1. Home grown systems – such as spreadsheets, MS access which are useful for
organising
2. Document Management Systems – that prioritise and organise documents for searches
3. Enterprise Contract Management Systems – that organise events, record
communications data and give alerts to expiry and renewals

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 4. Legal document analysis systems – that needs to focus on corporate legal interests

It was recommended that the above are very helpful in growing services organisations that
handle multiple services provided internally and externally. Hence, as part of project’s
procurement, managing contracts is important for successful projects management. However
the focus here is how Contracts Management as part of project’s procurement contributes to
strategic involvement and strategic objectives achievement.

This is established when Contracts management includes a proper Contracting Strategy that
specifies the relationships and roles of parties to the project. APM (1996) stated that a
contract should be designed to be the basis for successful project management. To do so it
has to be right in principle (the right contract strategy) and right in detail (right terms and
conditions). Contract Strategy is therefore needs to be set before forming the contract and the
Agreement documents.

4.5.2 Contract Strategy:

Since forming a contract is basically an agreement between two parties (Purchaser and
Supplier) on the objectives, the theory of Contract Strategy sets the basics of forming a
contract for responsibilities, priorities, risks of the project, and payments, plus how these may
change during services to be carried. Manchester notes [3] (2006) explains that Contract
Strategy specifies terms of a contract that defines:
- Who is responsible for defining objectives and priorities, financing, innovations,
design, quality, operating decisions, safety studies, approvals, scheduling,
procurement, software, construction, equipment, installation, testing, commissioning
and managing each of these
- Who is to bear the risks of investing in the project, defining it, specifying
performance, design risks, selecting sub-contractors and their defaults, site
productivity, delays, mistakes and insurance..

Hence, setting basics of contract strategy can be mainly summarized by:

1. Setting a Clear Scope:

How well defined are the objectives of project. Through a clear Scope of Services,
deliverables are stated and claims and variations are minimized.

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Chritamara et al. (2001) stated the necessity of a well-established project scope. It was
explained that many research works have indicated the problems resulting from improper
identification of project scope. It was suggested that clear establishment of the initial scope of
a project (or the completeness of the client's brief) is a critical factor in project success.

2. Risks Management:

How risks are controlled and managed. Allocating of risks and responsibility are essential.
Risks borne by the purchaser (Company) are those stopping the work by forces beyond
Contractor’s control. Project investment risks, Acts of God, and Force Majeure are usually
not recoverable. APM (1998) says that “Experienced customers and analysts of completed
projects agree that only rarely should bids be invited for a contract on the basis that a supplier
must bear all the risks. The argument against this type of contract is that suppliers would have
to cover themselves by including high contingency sums in their estimates.”

In industrialized countries, risks responsibility should be allocated to the party which is best
able to manage it to suit the objectives of a project. This gives the purchaser the best value of
money. One should bear in mind that risks shall be in a way that supplier is motivated to meet
projects objectives. Once risk is identified, appropriate measures can be made to deal with it,
by avoidance, reducing its likelihood, by transferring responsibility for it, or by insuring
against it. Insuring against risks should be economic decided and insured risk should be
quantifiable, pure risk that is potential for harm not gain, and loss must be unintentional. Both
parties should know that some risks are uninsurable. Contract Strategy specifies the risk
management of a project whether transferring to one party, jointly taking the risk or
allocating it to the party that can best manage it.

When procuring a project, joint risk allocation and management can be considered. Rahman
and Kumaraswamy (2002) have conducted research through three planned questionnaire
surveys in the first phase of a broader Hong Kong based study on ‘Joint Risk Management’
(JRM). Their survey compared perceptions on both present and preferred risk allocation,
including JRM, in construction contracts. The respondents were having working experience
in Hong Kong from various professionals and practitioners representing broad groups of
academics, consultants, contractors and clients. The results showed the divergences in
perceptions on both present and preferred risk allocation, both within and between different
contracting parties.

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Despite such divergences, respondents professed a general enthusiasm towards JRM,
irrespective of their contractual or professional affiliation. They said that respondents
preferred to assign reduced risks from either one or both contracting parties to JRM, rather
than shifting more risks to the other party. This is indicative of a perceived trend towards
more collaborative working environment.

Rahman and Kumaraswamy (2005) stated that exhaustive risk allocation cannot be achieved
through contract conditions, because all risk items cannot be foreseen at planning stage. An
effective management of unforeseen risks/events at post contract stage needs the collective
efforts of all major contracting parties. Furthermore, a theoretical construct was examining a
series of recent Hong Kong based studies on joint risk management. The results lead to the
development of a framework for building a coalesced team that includes owners, consultants,
contractors, subcontractors and suppliers. Project partners need to be conditioned, starting
with their selection processes, by incorporating appropriate relational qualities as important
selection criteria. They need to work under suitable teambuilding protocols, with flexible
contract conditions and appropriate adjustment mechanisms that would all be tailored to suit
each specific project.

Therefore, strategic position of Procurement in Contracts greatly helps in properly managing

risks. Oil & Gas projects mostly incur lump sum type of contracts that places most risk to the
Contractor. Alternative methods should be adopted as stated above.

3. Terms of Pricing and Payment:

The best terms of payments are those suiting the project to motivate both parties to achieve
objectives of the project. The payment terms mostly know are Fixed Price (Lump Sum)
payment, Activity Milestone payment, Unit Rate payment, Cost-Reimbursement, Target cost,
and mixed terms of payments. Whatever term of payment is used, it should be the best suiting
the nature of project. This is however the confusion in using the terms Pricing and Payments.
Blansnky et al. (2006) explain the differences between Pricing and Payment and the different
methods in both. It is stated that Pricing methods are how you come to an overall price for the
work/services. Different types of contract have different pricing methods. Some contracts can
only have one type, others can have many types. Payment Methods are how, where and when
the prices are turned to receive payments.

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Pricing Methods in contracts are:

 Lump Sum: Price for the whole of the contract, Global exposure, Only adjustable in
limited circumstances as set out in the contract, Easier and less expensive to administer,
Must allow time and information to calculate realistic price, Time and cost of tendering
can be very great, Need to get a proper breakdown of the Lump Sum.

 Unit Price / Re-measurable: Price of the project calculated in accordance with actual
work done, Price established by multiplying units of work done, by unit of prices set out
in BOQ or Schedule of Rates, Used in amount of work is not certain, Employer has the
risk of number of units changing, Employer has the risk of unit price changing, Recent
trend to allow limited changes to the unit prices, Higher administration costs than lump
sum contracting.

 Cost Plus / Cost – Reimbursable: Employer pays for all costs incurred by the, contractor
plus an agree fee for profit, The Fee can be fixed, fluctuating or % of actual costs, Cost
plus generally used where it is impossible to, estimate price/quantities, Usual to include
an incentive mechanism with cost, plus e.g. target costing, Sometimes only reasonable
costs can be recovered, Employers need large administrative teams to police, cost plus,
Many records are generated by cost plus.

 Target Costing: Setting a Target Cost, Any costs above Target Cost means Contractor
contributes to overrun (Pain Share) and his fee is reduced, Any costs above Target Cost
means Contractor, shares in savings (Gain Share) and his fee is increased, Need
experience to set the Target Cost, Promotes good common working practices, Heavy
administrative burden, Flexible method of pricing.

 Guaranteed Maximum Price (GMP): setting the maximum, Contractor bears cost of
everything in excess of GMP, Limited chance to adjust GMP, it is in effect a cap on a
lump sum cap but contractors tend to set a higher GMP than if lump sum pricing

 Time Cost: mostly for Consultants and at Agreed rates.

The Payment Methods in Contracts are:

 Advance Payments
 Payment after completion

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  Very rare and only for simple work
 Payment attached to Schedule of Tasks
 Milestone Payments at:
o Completion of each milestone or
o Periodically (for all milestones completed in that period)
o Often combined with progress payments
 Progress payments
 Periodic interim payments (calculating work done)
 Periodic interim payments (% of Contract Price)

The above process is usually decided by the Owner; however, there is no harm to decide it
with the help of Contractor since at the end he will be the receiving party. Also, whatever the
term of payment adopted, the purchaser should consider risks of these payments before
inviting the bids. Payment risks given by APM (1998) are:
a. Bonds or Guarantees are required: upon receiving bids from suppliers.
b. Effects of inflation: for lump sum contracts, upon standard cost index data,
extra payment can be made to supplier to compensate for inflation of his
costs.
c. Currency rate fluctuation: for lump sum contracts, this can be allowed in
purchaser’s budget.
d. Payments due on termination: including an option of terminating a
contract, with terms setting any payment due.
e. Payment Security: the purchaser ability to pay should be considered and
upon main supplier’s payment, sub-contractors’ payment should be made

4. Liquidated Damages (LD’s) and Incentives:

The contract should clearly specify within the terms and conditions the LD’s terms.
Webb (1996) defined LD’s as a clause that is inserted into a contract to provide a
financial remedy to the customer for a failure by the contractor regarding some aspect of
the work. The LD’s are specified as follows:
1. The late charge method should be clearly specified; i.e. by saying “a 1% up to 10%
of contract price will be deducted from contractor’s payments” in case of delays.
2. It is necessary to review LDs on projects’ case by case basis. It should allow the use
of Milestones. Since a Contractor might meet certain milestones, he should be

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 charged for milestones delayed. However if no milestones are incorporated the
genera LDs clause (in point 1) can be retained.
3. Also, since there is a “LDs” article, there should also be “incentives” article for early
completion which might avoid Contractors from putting contingencies assuming
worst cases, as there will be a balance in requirements. This increases innovation in
project execution, and also assures the Client that Contractor may not include this
charge in the price. If “Incentive” clause is not present, Clients may end up paying
double prices if Contractors have already put the charge amount in the price.

4.5.3 Dispute Resolution:

No mater how clear contract Strategy is specified, disputes in a project can arise for many
other reasons. Cheung and Suen (2002) stated that Disputes are inevitable in construction
projects and Dispute Resolution Procedures such as litigation, arbitration, mediation, dispute
adviser and negotiation are widely practised. A decision-making model was created using the
Analytical Hierarchy Process (AHP) and Multi-Attribute Utility Technique (MAUT). The
model comprises four parts: selection criteria, dispute resolution strategies, collection of
utility factors and selection criteria weightings. These were gathered from an empirical data
collected through an interview survey with selected experts in the field.

Then, a model was designed to identify in a systematic manner an appropriate dispute

resolution strategy rather than relying on subjective decisions. It is tested using a hypothetical
scenario in which three case studies were evaluated. The selection criteria are: overall
duration; relative cost; flexibility in issues, strategy and agreement; confidentiality;
preservation of relationship; binding decision and enforcement; degree of control by parties;
and degree of control by the third party neutral.

It is important to set a dispute resolution in the contract before it goes through litigation
judgments. When represented to court, dispute resolution rout maybe questioned to what
extent the parties came finally to litigation. Manchester Notes [12] provides the means and
methods of Dispute resolutions in projects. Through Dispute resolution, stages of resolving a
conflict is drawn that might take the conflict into settlement before representing it to the
courts.

STUDENT ID: 20050014 PAGE 49

Dispute Resolution can be obtain by considering the following stages:
 Amicable Settlement; which says that if disputes arise, parties shall recommit to
resolve disputes in an amicable, professional and expeditious manner to avoid
losses, delays and disruptions to works. Any disputes shall be first referred to the
parties for amicable settlement by representatives with high authority specified in
the agreement.
 Alternative Dispute Resolution (ADR); which says in case the above settlement
fails, the conflict may be escalated to a Joint Dispute Resolution Committee to
resolve the dispute. Usually this committee consists of three directors or senior
managers who are not involved in a day to day management of the agreement. In
case the committee resolved the dispute it shall be biding for both parties.
 Arbitration; which says that in the event that ADR fails to resolve the dispute, the
dispute shall be settled by Arbitration. It is important to specify the location where
arbitration takes place, rules center of arbitration, national law that governs
arbitration, and number of arbitrators. Usually the country of the project is the
place of arbitration and the governing law, International Chamber of Commerce,
unless other is specified, is rules center and deciding number of arbitrators which
is usually three. Then, arbitrators’ decision becomes final and binding on both
parties. Also, Judgment may be entered in any court having jurisdiction.

Further, the contract should mention whether works or services under the contract shall be
pending or disturbed during resolving a dispute. It was proven that ADR holds the best
practice being an effective method in projects.

ADR avoids legal procedures that take long period to issue a decision on settling a dispute.
Pollington (1999) explained that many legal issues such as ADR and mediation are impacting
procurement which bring extensive savings to industry. Industry should look more in trained
mediators to take role in projects. Hill (2003) explained that ADR has benefited many sectors
and specially private sectors. ADR has mainly benefited sectors that are unrepresented or
represented by lawyers primarily interested in fees. Many private sectors do not know to what
extent whether their lawyers fees are realistic upon successful cases. It was further explained
that ADR is less expensive that litigation, time effective and processed at convenience of the
parties. Parties can form the ADR as they prefer.

It is also explained that laws and regulations encourage more comprehensive use of ADR.
ADR’s might be formed in involving a third party or only higher management from both

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parties. If a third party is involved in ADR, he is usually referred to as a mediator. It is
explained that Mediators are preferred to have Project Management, Commercial,
Government and Legal background in order to give sound judgment from all aspects.
Furthermore, since higher management are involved in ADR, process of resolution is
assumed to be faster. Hence, ADR for a strategic solution to resolve disputes, or claims and
delays that turn into disputes.

4.6 Procurement in Handling Claims and Delays

Procurement Strategy should also specify methods and systems to deal with Claims and
Delays along with Dispute Resolution that should be properly covered. Harris and Scott
(2001) described methods of dealing with delay claims. This is followed by a discussion of
results from a survey aimed at finding out exactly how professionals in the UK construction
industry approach these difficult issues. It appeared that those who deal with delay claims in
the UK are likely to use a critical path method network to do this and generally approve of a
methodology that attempts to understand how well the contractor would have fared but for
the existence of employer-responsible delays. However, there is less agreement about who
should be said to ‘own the float’, but as is explained in their paper, it is possible for this
matter to be dealt with by the insertion of a clause in the contract documents.

Turner (1995) explains that to better control delays and claims in the project, client contractor
interface should be managed. It is explained that client and contractor are the parties to the
contract, which will be signed on their behalf by directors. However the administration of the
contract and the management of the project will be delegated to typically a project manager
and/or engineer. Both companies will delegate powers, duties and responsibilities to these
individuals to act on their behalf. When changes occur to the contract including delays to the
agreed schedule, the matter should be reported to directors if beyond the individuals control
to decide.

To avoid all this, the client and contractor should put in place an administrative procedure to
manage the contract and performance. Such procedure should include review meetings and
document control procedure. The review meeting should be as follows:
- Strategic Review meeting between client and contractor directors
- Progress review meetings between client and contractor project
managers
- Technical review meeting (design or compliance) between engineers.

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An example is given of a variation order being issued by junior engineers at progress control.
Often junior engineers can be commercially naïve, with managing consequences for their
employer, whether the client or contractor. Worse still if the client has a history of cost plus
contracts, the engineers sometimes behave as if they have the authority to change the
specification or design. This explains the involvement of higher management in changes.

Morledge et al. (2006) explains that the client should specify mechanisms for the changes in
the contract. To avoid changes, the client project manager’s objective should be to assist
contractor to be successful. He/She should understand that if the contractor is highly
performing, the clients representatives work is minimized and the other way around. If
changes are made by client then more time and change in schedule should be adopted.
However, if the contractor is delaying with no changes, there are two options for the client
regarding low performance. One is to penalize the contractor financially; two is to assist the
contractor to become better performing. It is explained that option two leads to client’s
understanding of how to address and adopt changes.

No matter what ways and methods to be adopted, the argument is that in the presence of
proper Procurement Strategy, proper ways and methods are deployed. If one of the project
objective is to complete the project on schedule, Procurement methods on handling delays
and claims ensure the objective is met either by specifying in the contract document or better
management of the contract administration phase. Blanksby [1] (2006) stated that delays in a
project affect both the client and contractor; hence, it should be clearly stated in the contact to
be bound between them. Contract also specifies provisions to extend this completion if reason
of delay is due to additional work, bad weather, employer’s delays and other circumstances.

The all abovementioned show the objectives of a Procurement Strategy contributing to

achieve enhancement and betterment of any organisation’s projects. Next section shows the
summary of findings from Literature.

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4.7 Summary of Literature Findings

Through Literature Project Strategy is placed through Portfolio and Program to the heart of
achieving strategic Business objectives which also form parts of the Hypothesis of the
research. SCM was found to be placed at Strategic position and linked to Corporate /
Business Strategy for projects Outsourcing. Literature also found dealing with project
procurement as part of the SCM. This modifies the hypothesis model given in Figure 1 details
of which will be given in Chapter 6. Thus, SCM was found linking Procurement to Corporate
/ Business through strategic relationships arrangement such as Alliancing and Partnering.
Procurement was found when concentrating on strategic objectives promotes for strategic
arrangements such as Alliancing, Partnering, PFI, PPP, and to some extent D/B and PIPS.
When however focusing on projects objectives it was found promoting methods such as
mainly D/B and PIPS, construction management and other procurement systems and
subsystems viewed in Literature.

We have also seen the contents of Procurement Strategy for projects which are:
1. Procurements selection and Delivery Methods and Systems of Projects
2. Relationships of Projects Parties
3. Selection and Evaluation of Contractors
4. Risk Management of projects
5. Contracts Management and Strategy
6. Handling Claims, Delays and Dispute Resolution in Projects

Through Literature review, little research is observed to link project Procurement to

Corporate / Business Strategy. However, the link of Project Procurement Strategy to Project
Strategy was able to be seen. Hence, the link to Corporate / Business Strategy as stated on the
hypothesis, aim and objectives is further to be explored. Also Literature reviewed involved
industries such as Construction, Building and manufacturing and in many cases other
countries than UAE. The situations can be applied to Oil & Gas in industry in UAE; however,
more research including Oil & Gas should be carried. Problems encountered in Oil & Gas
industry projects in UAE because of miss-linking Procurement Strategy to Business Strategy
should be assessed. This is also to prove the essence to link Procurement Strategy of a
projects to Business / Corporate objectives in any industry and as well as Oil & Gas industry
in the UAE.
All the above will be uncovered through research questions leading to research methodologies
in the next Chapter.

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 Chapter 5
5. METHODOLOGY AND EMPIRICAL WORK

This section of the Dissertation is intended to show the research methodologies adopted to
respond to the open research questions from Literature findings. The open research questions
Literature led to are:

1. Why should a Project Procurement Strategy be linked to Corporate / Business Strategy

and how?

2. What are the bases of setting different Procurement Strategies and Processes in an Oil &
Gas Project?

3. What are the problems encountered in an Oil & Gas project due to a non-linked
Procurement Strategy of the Project to Corporate / Business Strategy?

4. What are the actions and strategies needed to improve and solve the problems?

5. Is linking a Procurement Strategy of an Oil & Gas project to Corporate / Business

Strategy solving the problems?

6. Does an effective Procurement Strategy for a Project improve its Performance?

The research methodologies adopted will assess the complete research objectives and test
hypothesis of Procurement Strategy for Oil & Gas industry projects in the UAE through the
data collected.

Before introducing the research methodology, review of a Corporate / Business Strategy in

Oil & Gas industry in the UAE is given to understand the strategic objectives to be achieved
through projects. The Corporate / Business Strategy reviewed is for an organisation in the Oil
Refining industry within the Oil & Gas industry in UAE. For confidentiality, a TK Co. name
will be used as the name of the organisation.

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5.1 Corporate / Business Strategy for TK Co.

TK Co. (2005) provides the detailed information about the company. TK Co. was established
in 1999 as a public joint stock company to take over the responsibility of refining operations.
Two refineries now constitute TK Co.’s core business. Refinery 1 is located within Abu
Dhabi Area with a capacity of 88 Kilo Barrels Per Day (KBPD). Refinery 2 is located 250
Km from Abu Dhabi city toward Saudi and Qatar boarder with a capacity of 140 KBPD. The
company’s areas of operation include the refining of crude oil and condensate, supply of
petroleum products and production of granulated Sulphur in compliance with domestic and
international specifications. Refinery 1 is mainly for domestic demand and Refinery 2 is for
export to other Emirates and International market. The main products supplied are:
 Liquefied Petroleum Gas (LPG)
 Unleaded Gasoline (ULG) Octane 91 (Plus), ULG 95 (Special), and 98 (Premium).
 Reformate and Naphtha
 Aviation Turbine Kerosene (Jet Oil) and Domestic Kerosene.
 Gas Oil, Straight Run Residue (SSR) and Liquid Sulphur.

TK Co. is responsible for developing the refining industry. The company is also in charge of
implementing national strategies aimed at enhancing the role of downstream industries in the
local economy of UAE. The number of Employees is near 1,800 from 40 Nationalities. TK
Co. was targeting to increase the Number of UAE nationals over 50 % by 2007.

Aiming at becoming a leader in the oil refining business, TK Co. is now working on
expanding its activities in the downstream sector. It is also exerting all possible efforts to face
the challenges of the 21st century in a rapidly-changing market. Hence, a large number of
projects are developed to facilitate the growth. Billions of UAE Dirhams (Dhs.) are invested
in these projects.

TK Co.’ Vision
To be world class, reliable, cost effective, quality focused in oil refining and related business
by implementing best practices, highest HSE standards, Environment protection and retaining
motivated professionals.

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TK Co.’s Mission
The company’s missing statements are:
 To be a pacesetter and global player in the oil refining business
 To identify and deploy product and process technologies, techniques and
methodologies that provide a competitive edge.
 To maintain the highest standards in health, safety and environmental aspects
 To be domestically dominant and competitive in refining business
 To achieve the predetermined Nationalisation targets
 To actively enter into new business in fields that draw on its fundamental strengths in
oil refining.

TK Co.’s Corporate and Business Objectives

TK Co.'s Corporate / Business objectives come from being recognised as a pacesetter in
creating sustainable value growth through innovative energy solutions. In implementing this,
it aims to link its technical strength and regional stature with the speed and agility of its
enterprise and willingness to do things differently. As it works to build the future, its goal is
to achieve the highest level of success for the country, society and employees.

Its professional activities are governed by set of principles which define its teams’
relationships with all parties involved. The main guidelines of these principles are quality
backed by professional excellence, the highest standards of honesty, integrity and fairness.
Also, to conduct its business with highest standards of honesty, integrity and fairness to offer
opportunities for success to all its suppliers and contractors in spirit of fair competition and
mutually rewarding collaboration. It will work on enhancing its performance to meet its
overall objectives of cost control and adopt state of art equipment and technology to optimise
operations.

Finally, objectives of the Company come from actively pursuing its role towards greater
achievements for the benefit of the country and its people. It will exert all possible efforts to
seize today’s opportunities and meet tomorrow’s challenges. These efforts will result in
adding substantial increases to UAE’s refining business.
Hence, the Corporate / Business objectives of TK Co. with regard to HSE, Operations,
Organisation and Value are:

STUDENT ID: 20050014 PAGE 56

HSE:
 Manage and operate the Company facilities in a manner that protects the environment,
provides a safe, healthy and rewarding workplace for employees, contractors and
communities in which it does business.
 Maintain the highest HSE standards in compliance with Abu Dhabi / UAE laws and
adopted Oil & Gas international standards.
 Achieve a cleaner environment, minimize flaring and hydrocarbon losses.

Operations:
 Ensure efficient/economical operations and achieve higher rating in international
benchmarking standards.
 Continually improve operations & related processes/ technologies to compete in the
refinery industry, both regionally and globally, and become a leading refiner.
 Implement strategies to enhance safety, reliability, availability, operability, and
productivity of Plants.
 Maintain reliable supply of refined products to local and international markets.

Value:
 Enhance corporate performance/ returns through continuous improvement in business
processes, competencies, technologies and best practices.
 Envisage and implement expansion, diversification and value-addition projects on
time, within cost, quality and performance parameters.
 Acquire materials & services by implementing appropriate strategies to ensure on
time delivery, cycle time reduction, product/ service quality and optimum cost.

Organization:
 Provide high quality working environment/ support services to enhance employee
satisfaction.
 Create / maintain Company’s progressive image in the industry and society.
 Enhance staff competency level through effective professional training.
 Achieve UAE workforce target as per plan and develop nationals to achieve high
professional standards.

STUDENT ID: 20050014 PAGE 57

5.2 Data Collection

To answer the open research questions from Literature, Data is to be collected by gathering
responses from two groups. First group are professionals working in the area of Project
Procurement directly to assess their opinion on linking Project Procurement to Corporate /
Business Strategy. The second group are management staff (Projects Division Manager and
Contracts Manager) and the Project Management Staff for particular projects under study and
survey (Project Manager, Project Coordinators and Engineers) to assess their feedback on
Procurement process and practices adopted for those particular projects. Data then will be
collected through the methodologies adopted. The methodologies adopted to collect the data
are explained in the next section.

5.3 Research Methodology

To collect the data mentioned, two methods are adopted for this research, a quantitative and
qualitative method. The methods are: 1. A Survey on Strategic Procurement, as a quantitative
method, which includes particular questions on aligning Procurement to Overall Business
Strategy (Questionnaire). 2. Case Studies, as qualitative method, for studying different
projects in Oil & Gas (either Interviews or on paper Study Survey) to assess the impact of the
Procurement practices, process and strategies undertaken in the projects.
These two methods are found most appropriate since the topic is of a highly specialized area
of Management of Projects and methods adopted should ensure responses on support to the
hypothesis, aim and objectives of the research. The first method will assist in examining
linking Procurement Strategy to Overall Business Strategy in Oil & Gas industry from
respondents working in the area of Project Procurement. The second method will assist in
assessing Procurement processes and practices in Oil & Gas Projects. This is to examine
linkage of Procurement Strategy of a particular project to Corporate / Business Strategy in Oil
& Gas to investigate the problems in the missing link.

5.4 Survey Questionnaire – Quantitative Method

A Survey Questionnaire form, as a quantitative method, was developed. The questionnaire

consists of questions on linking Procurement Strategy to Business Strategy in Oil & Gas and
on the contents of the Procurement Strategy achieving Business objectives. The
Questionnaire was distributed to 60 professionals dealing directly or indirectly with the
Project Procurement in the Refining industry in Oil & Gas, out of which 35 are working for
Refining industry (Client) and balance 25 for Consultancy (Contractor) firm. 29 professionals

STUDENT ID: 20050014 PAGE 58

responded to the Questionnaire (19 respondents from Client and 10 from a Contractor) as
illustrated in Figure 12.

Figure 12 (a) shows the total population requested. Figure 12 (b) shows the percentages of
Client and Contractor respondents out of the total population and (c) shows the percentages
of the two groups from the responded sample.

Total Population N= 60

Contractor
42%

Client
58%

(a)
Total Population N=60

Client
32%

No
Response
51%

Contractor
17%

(b)
Respondents (Sample) S= 29

Contractor
34%

Client
66%

(c)

Figure 12 The percentages of Total Population requested, Total Responses and Sample Responses

Questions were phrased in terms of eliciting a ‘Yes’, ‘No’ or ‘Maybe’ answer to ensure that
questions are:
- Time effective for the respondents.
- Easy to be answered.
- Exact views can be accurately obtained.

Annexure 2 shows an example of a duly filled Questionnaire received from a Consultant.

From the Questionnaire forms, data was then gathered and analyzed and weightings are
assigned to different responses. The Case Study survey of the projects is the second method.

STUDENT ID: 20050014 PAGE 59

5.5 Projects Case Study Survey – Qualitative Method

As a qualitative method, a Case Study of four projects in TK Co. to investigate problems

encountered in Procurement process was developed. The Case Study was either through
interviews or on paper, as per the individuals’ preferences. The Interview (or on paper
survey) included questions on identifying Procurement selections, processes and practices in
the projects. The Case Studies of projects are assessed in lieu of the Corporate / Business
objectives seen before.

First a Contracts Manager in TK Co. was interviewed for Projects Procurement selections,
practices and bases also using the some of questions on the survey form. Then, Projects
Division Manager was interviewed on the approaches in managing projects such as higher
management involvement, Strategic objectives, Project objectives and the relations to
Procurement of the projects. Finally, project managers and different project team members of
the projects were interviewed / surveyed in detail using the questions developed. Those
members stated the Procurement routes in the projects, the procurement processes, bases of
selections projects and the problems encountered in the projects as asked. As also asked, they
gave their suggestions to improve current processes and practices.

Annexure 3 shows an example of the on paper Project Study Survey dully filled by a Project
Manager of one of the projects. From the Survey, the objectives, either Strategic or Project
based, are assessed to draw the links while viewing the Corporate / Business objectives. The
details of the projects and the surveys are given in the in the next chapter.

After Data gathering, results were analyzed to arrive at the solutions and recommendations
aimed at improving the current Procurement processes in the Oil & Gas industry in UAE and
the links intended. The analysis of results is also in the next chapter.

STUDENT ID: 20050014 PAGE 60

 Chapter 6
6. PRESENTATION, ANALYSIS AND DISCUSSION OF RESULTS

This chapter is intended to present, analyse and discuss the data collected from the methods.

6.1 Presentation of Results – 1st Methodology (Questionnaire)

This section will present the results from first methodology, analyse them and provide a
discussion in line with Literature findings.

Tables 3 and 4 show the responses to the Questionnaire developed on linking Procurement
Strategy to Business Strategy (Table 3) and the results of the contents that effectively link
Procurement Strategy to Business Strategy (Table 4).

In Table 3, the ranks of strategic activities of Procurement are given in hierarchies as per the
number of respondents agreeing.

Number of Respondents
Strategic Procurement N = 29 out of 60 Total
Rank Activities for Oil & Gas (19 Client and 10 Contractor)
Projects Agreeing Agreeing
Agreeing
(Client) (Contractor)
1 Improves Business and 15 10 25
organisational relationships

2 Should be towards achieving 13 8 21

Overall Business Objectives

3 Lacks advanced Strategies 7 10 17

4 Requires developments 7 10 17

5 Should involve Higher 9 7 16

Management decisions

6 Should be part of strategic 8 6 14

plans, vision and mission

7 Affects Project's Performance 5 4 9

Table 3 Responses to Linking Procurement Strategy to Business Strategy in Oil and Gas

Figure 13 shows the chart to further illustrate the hierarchies of responses from Client,
Contractor and both. Numbers 1 - 7 on the x-axis represent the activities in Table 3.

STUDENT ID: 20050014 PAGE 61

 Questionnaire Response Improves Business
1
(Procurement Strategy to Business Strategy) relationships

30 Should be towards
achieving Overall
2
Client Contractor Total Business
25 Objectives
Number of Respondents

Lacks advanced
3
20 Strategies
Agreering

Requires
4
15 developments

Should involve
10 5
Higher
Management
decisions
5
Should be part of
6 strategic plans,
0 vision and mission

1 2 3 4 5 6 7 Affects Project's
7
Performance
Strategic Procurement Activities in Oil & Gas
Figure 13 Numbers of Respondents Agreeing to Strategic Activities of Procurement Strategy in Oil & Gas

In Table 4, the ranks of the contents of Procurement Strategy in achieving Business

objectives in Oil & Gas are given in hierarchies as per the number of respondents agreeing.

Number of Respondents Total

Contents of Procurement Strategy N = 29 out of 60
Rank for projects in Oil & Gas industry (19 Client, 10 Contractor)
that achieve Business objectives Agreeing Agreeing
Agreeing
(Client) (Contractor)
1 Contract Strategy 19 10 29
2 Procurement Systems and Methods 18 10 28
3 Financial Rights and Payment Terms 17 10 27
4 Risk Management 15 10 25
5 Relationship Management 15 9 24
6 Dispute Resolution, claims & delays 13 10 23
7 Project Performance 11 6 17
Table 4 Responses on Contents of Procurement Strategy in Oil & Gas

Figure 14 shows the chart to further illustrate the hierarchies of responses from Client,
Contractor and both. Numbers 1 - 7 on the x-axis represent the contents in Table 4.

STUDENT ID: 20050014 PAGE 62

 Questionnaire Response 1
Contract
Strategy
(Contents of Procurement Strategy)
Procurement
35 2 Systems and
Number of Respondents

Client Contractor Total Methods

30
Financial
25 3 Rights and
Agreeing

Payment Terms
20
Risk
4
15 Management

10 Relationship
5
Management
5 Dispute
0 Resolution,
6
claims &
1 2 3 4 5 6 7 delays
Questions Project
7
(Contents of Procurement Strategy) Performance

Figure 14 Numbers of Respondents Agreeing to Contents of Procurement Strategy in Oil & Gas

6.1.1 Analysis of Results and Discussion – 1st Methodology

The results of data presented previously will be analyzed and discussed in this section.

6.1.1.1 Linking Procurement to Business Strategy (Analysis of Survey Questionnaire Data)

From Table 3 above, the quantitative data on strategic activities of Procurement in Oil & Gas
as per the number of respondents agreeing are analyzed in percentages as in Table 5 for the
discussion purpose.

STUDENT ID: 20050014 PAGE 63

 % from the Sample Responses Total
Procurement Strategy for N = 29 out of 60
Rank Projects in lieu of Business (19 Client and 10 Contractor)
Strategy in Oil & Gas Agreeing Agreeing
Agreeing
(Client) (Contractor)
1 Improves Business and
79% 100% 86%
organisational relationships

2 Should be towards achieving

68% 80% 72%
Overall Business Objectives

3 Lacks advanced Strategies 37% 100% 59%

4 Requires developments 37% 100% 59%

5 Should involve Higher

47% 70% 55%
Management decisions

6 Should be part of strategic

42% 60% 48%
plans, vision and mission

7 Affects Project's Performance 26% 40% 31%

Table 5 % of Responses to Linking Procurement Strategy to Business Strategy in Oil and Gas

Figure 15 shows the chart to illustrate the response percentages. Detailed discussion of the
analysis is in the following section.

Procurement Strategy to Busines Strategy

Improves Business
1
relationships
100% Should be towards
achieving Overall
2
80% Business
Objectives

60% Lacks advanced

% 3
Strategies
Agreering
40% Requires
4
developments
20%
Should involve
Higher
5
0% Management
1 2 3 4 5 6 7 decisions

Client 79% 68% 37% 37% 47% 42% 26% Should be part of
6 strategic plans,
Contractor 100 80% 100 100 70% 60% 40% vision and mission
Total 86% 72% 59% 59% 55% 48% 31%
Affects Project's
7
Strategic Activities Performance

Figure 15 % of Responses Chart to Linking Procurement Strategy to Business Strategy in Oil and Gas
STUDENT ID: 20050014 PAGE 64
6.1.1.2 Discussion (Linking Procurement to Business Strategy)

From the percentages above we can see that a high percentage of respondents (86%) are for
adopting Procurement Strategy to improve contractor/client relationships. It was seen from
Literature the link of SCM to Corporate / Business Strategy for Outsourced Projects, Freytag
(2002) and Stuart (1997). Then, it was explained that Supply Chain Strategy is basically how
clients and suppliers work together to achieve overall business objectives, Elmutti (2002),
Ellram et al. (2004), Lan (2003) and Ogdenet al. (2005) Then, it was seen from Literature the
importance relationship management to link Procurement to SCM, Cheung (2006) and
Khalfan (2005). Hence, Procurement Strategy is linked to Supply Chain and Business
Strategies in that aspect.

The relatively high percentages on Procurement achieving Overall Business Strategic

objectives (72% of respondents) reveal the strategic clout of procurement. Hence,
Procurement Strategy should be linked to Overall Business Strategy. Although relatively
lower percentages (59% of respondents) stressed on Procurement in Oil & Gas lacking
advanced strategies and requiring developments, it does indicate that more than half agree
with this perception. Also 55% of respondent agreed that Procurement Strategy should
involve higher management and 48% agreed that it should be part of strategic plans.

In summation, at least focusing on Strategic objectives can reveal the acceptance of linking
Procurement Strategy to Corporate / Business Strategy. It can be said that the surveys
confirm acceptance of the Hypothesis of the research or as was found in Literature that
placing Procurement Strategy to Overall Business Strategy is to be through SCM to close the
loop. This was also suggested by one respondent (see next section).

STUDENT ID: 20050014 PAGE 65

6.1.1.3 Contents of Procurement Strategy (Analysis of Survey Questionnaire Data)

From Table 4 above, the quantitative data on strategic contents of Procurement in Oil and
Gas as per the number of respondents are analyzed in percentages as in Table 6.

Number of Respondents Total

Contents of Procurement Strategy N = 29 out of 60
Rank for Oil & Gas projects in (19 Client, 10 Contractor)
achieving Strategic objectives Agreeing Agreeing
Agreeing
(Client) (Contractor)
1 Contract Strategy 100% 100% 011%
2 Procurement Systems and Methods 95% 100% 97%
3 Financial Rights and Payment Terms 90% 100% 99%
4 Risk Management 79% 100% 68%
5 Relationship Management 79% 90% 69%
6 Dispute Resolution, claims & delays 68% 100% 79%
7 Project Performance 58% 60% 59%

Table 6 % of Responses on Contents of Procurement Strategy in Oil and Gas

Figure 16 shows the chart to illustrate the response percentages. Detailed discussion of the
analysis is in the next section.

Contents of Procurement Strategy

Contract
1
Strategy
100%
Procurement
2 Systems and
80%
Methods
Financial
60% 3 Rights and
%
Agreeing Payment Terms
40% Risk
4
Management
20% Relationship
5
Management
0% Dispute
1 2 3 4 5 6 7
Resolution,
6
Client 100 95 89 79 79 68 58 claims &
delays
Contractor 100 100 100 100 90 100 60
Project
Total 100 97 93 86 83 79 59 7
Performance
Contents

Figure 16 % of Responses Chart to Contents of Procurement Strategy in Oil and Gas

STUDENT ID: 20050014 PAGE 66

6.1.1.4 Discussion (Contents of Procurement Strategy)

To confirm the strategic objectives of Procurement Strategy, from the percentages above, we
can see the highest percentage (100% of respondents) accept that an Effective Procurement
Strategy should include Contract Strategy. It was seen from Literature that (Sifri (2003),
Turner (2004) and APM (1998) suggested Procurement Strategy should include Contract
Strategy that is basically the document which clients and suppliers agree on to achieve project
objectives.

Also, high percentages of respondents agree that Procurement Strategy should include
Procurement Systems and Methods, and Financial rights and Payments (97% and 93% of
respondents, respectively). We have seen from Literature – Chritamara et al (2001), Dulaimi,
Ling, Ofori and Silva (2003), Koskela (2003), Koolwiji and Vrijhoef (2005) and H. M.
Treasury (2007) – that different procurement methods and systems suggest Procurement
Strategy should include on procurement methods. We have seen examples of Procurement
Systems and Sub Systems from Kumaraswamy (2006).

We can also see other items of Effective Procurement Strategy being agreed to by
respondents – 66% of respondents accept inclusion of Risks Management as also seen in
Literature by Rahman and Kumaraswamy (2002 & 2005). A total of 83% of respondents
agreed to inclusion of Relationship Management. This was seen in the earlier section.

79% of respondent agree on inclusion of Dispute Resolution, Claims and Delays; which
Literature explained in detail, Hill (2003), Pollington (1999), APM (1998), Harrisand Scott
(2001), Cheung and Suen (2002) and Blanksby (2006).

However, we have seen low acceptance (31% of respondents) of Procurement Strategy

affecting Project performance from last section (Table5) as also compared to low acceptance
(59%) on including Project Performance (Table 6). This is to be explained in Chapter 8,
Conclusion and Further Research.

Further, as mentioned in previous section one respondent suggested to add SCM to be

included in the Procurement Strategy (refer to Annexure 2). Literature however suggested
that Procurement Strategy is rather part of the SCM. Lan (2003) explained that ISCM
involves linking suppliers and customers with internal supply processes of an organisation.
Cheung (2006) also explained that client organisation obviously influences supply chain

STUDENT ID: 20050014 PAGE 67

culture; commitment to the goals and objectives of an organisation is crucial in facilitating
successful implementation of relationship management or organisational changes.

This modifies the hypothesis model given in Figure 1. Figure 17 shows the modified model
of the links.

In-House
Program & Portfolio Management Project Management Projects
Business Strategy

Projects Project Strategy

Supply Chain Procurement Strategy Out-Sourced

Strategy Projects
Supply Chain Management Procurement Management

Figure 17 Business, Project and Procurement Strategies Modified Model

Presentation, Analysis and Discussion of Results – 2nd Methodology (Projects

Case Studies)

This section will present the results from the second methodology, analyse them and provide
a discussion in line with last section (Methodology – 1) and Literature review.

The case studies in detail serve the contents of Procurement Strategy that achieve Corporate
Business Objectives seen. Alterations and improper utilization of such contents can cause
problems that are to be seen in the projects

First the details of the projects studied are given. Then, the project team, detail results from
survey and problems will be shown. Refer to Annexure 1 for the phases of a major project in
Oil & Gas to understand the discussion. In the details, the difference between Scope of
project and Project objectives is that the latter is the outcomes of the project executing the
scope. Budget is the estimated cost and Price is the lowest or the awarded price.

STUDENT ID: 20050014 PAGE 68

 6.2.1 Case Study 1: Halon Replacement from Refineries Project

The first case studied for investigating problems to Procurement Strategy and its contents is
“Replacement of Halon System from Company’s Refineries Fire Extinguishing Systems
project”. Table 7 summarizes the details of the project. Company here refers to TK Co.

Project Title Replacement of Halon from Company’s Refineries Fire Extinguishing Systems
Complying with international HSE standards.
International HSE standards stated that Halon decomposes toxic chemicals that are
harmful to human beings and unsafe to environment when spread out to put up fire
Business Strategic although it is a noble gas because.
Objectives Hence, feasibility Study was not required.
Company issued a policy to replace Halon with a safer gas that is noble and friendly
to Human beings and Environment by Oct. 2007.
Project to be carried out in Competition of tender to Contractors and Consultants.
Total Budget is Dhs. 12 Mil. (2 Mill for FEED, 5 Mil. for EPC of Refinery 1 and 5
Mil. for EPC of Refinery 2)
Project Budget and FEED price was Dhs. 2 Mil.
Price
EPC price was Dhs. 11 Mil. (6 Mil. For Refinery 1 and 5 Mil. for Refinery 2)
Total price was 13 Mil. (1 Mill over budget)
Stage of the project FEED is completed. EPC phase is on going
Scope of FEED included studying alternative gas agent and systems for both
Refineries as follows:
- Carry detailed survey and data collection of existing buildings and operations
- Carry out Qualitative Risk Assessment (QRA) for installation of the proposed
Agent with the detection and alarm system
- Develop a design of the system for the proposed gas agent including codes and
international standards.
Project Scope - Submit full Engineering Design, reports and presentation to Company
Scope of EPC included FEED verification and implementation and replacement of
Halon with the new agent including all systems modification and /or replacement.
Contractor shall strictly comply and carry works in accordance with company
procedures and the following international codes and standards:
- NFPA: National Fire Alarm code, National Electric code and Life safety code
- BS: British standards for Fire Alarm System
EN54: European Fire Alarm Standard
Removing Halon gas from the Refineries fire fighting systems by October 2007.
Replacement with a new Agent.
The proposed Agent and Systems shall be as per international standards specified.
Project Objectives
Achieve the targeted estimated cost which budget was allocated for.
To complete the project within schedule. Maximum duration is 1 year from award.
Warranty period for all works, materials shall be 12 months from completion.
Table 7 Details of Halon Replacement Project

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Project Team
The project team for the project consisted of:
- FEED Engineer (Consultant)
- Project Management Team from Company:
o Project Manager (from Projects Division)
o Project Coordinator (from Projects Division)
o 4 Project Engineers (2 from Projects Division and 2 from Refinery 1 and 2)
o 1 Contracts and 1 Procurement Engineers (From Projects Procurement Services
Department)

Details of the Project

The case study of the project carried on surveying the Project manager, Project Coordinator
and Contracts Engineer using the case study from in Annexure 3. After the survey, the details
of project were given as follows:
Procurement selection was based on procedures of FEED and EPC. Feasibility Study of this
project was not required because the Strategic objective was to comply with International
HSE standards. Hence, the project was assumed feasible.

Three contracts were made: one for FEED and two EPC contracts for Refinery 1 and 2
separately. All Tenders were on competitive bidding. Contracts types were all Lump Sum
price basis even for the FEED. Payments were on progress monthly basis against breakdown
of the Total Lump Sum price.

The FEED was completed in Feb., 2006 and EPC’s was awarded on 10 March, 2007. EPC
will be completed in Feb., 2008.
FEED Engineer (Consultant), on lump sum basis, carried designing of the system that will
replace the existing system of Halon. Consultant suggested “Inergen” gas to replace Halon
and provided all necessary system modifications.

Then, both EPC’s (for Refinery 1 and 2) were tendered out on the outcomes of FEED All
EPC bidders were required to verify the FEED during Tendering. Discussion of and problems
in the project are given next.

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Discussion (Problems in the Project)

Consultant carried the design although Company didn’t specify only one gas to be proposed.
When the gas was approved by Company and FEED phase was completed earlier, it was
complained by EPC bidders that Inergen was solely supplied by one agent in the UAE. This
agent was also participating in the Tender which prevented other bidders from supplying it.
Company strategic policy of tendering is to allow competitive bidding for EPC from different
companies especially for a Major project. Other bidders however didn't want to bid against
the bidder solely supplying Inergen because purchasing should have been through it.

Therefore other gases had to be accepted or Tendering will end up on a Single source basis.
Also, every gas is having its own designing system. There are gases found to have exactly
similar systems to Halon and require no system modification. Basically these gases would
require just discharging Halon and use the same system. So, it was hard to implement the
design provided by Consultant because it concerned Inergen only. This design had to be
changed concerning other gases or only Inergen is to be supplied. To achieve a Company
strategy on Tendering, Consultant was asked to consider other gases and perform designs
accordingly. Every gas got accepted by Company a design was to be formed for it.

The Consultant did not accept changes in design with the same price because their design was
approved by Company. For the change, and since FEED was Lum Sum, Consultant asked
extra charges to perform the design concerning other gases. The additional price was found to
be the same as of original price for Inergen. Company did not accept the additional price
from Consultant. Lum Sum price was problematic for change. If FEED was on unit rates
basis, the change could have been calculated.

Then, designing other gases systems were requested from the EPC bidders. It was conveyed
to EPC bidders during Tendering that any bidder propping a gas different than Inergen has to
perform the design and Engineering of it completely. However this can be waived from
bidders proposing Inergen as the design of it is available from Consultant.

Again bidders proposing gases (decomposing of toxic chemicals) like Halon were excluded
from the tender. Only gases that are of the same components to Inergen which are called Inert
gases (not decomposing toxic chemicals) were accepted.

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The additional designs were required to be within the EPC packages. As mentioned before
only one bidder proposed Inergen and took advantage of situation. This bidder was lowest for
EPC tender for Refinery 2

Another bidder proposing Argonite gas was the lowest for Refinery 1 EPC contract. This
EPC contract exceeded the budget for it by 1 Mil. This is because designing was part of the
EPC. The bidder who was lowest for Refinery 2 EPC and not requiring design formation was
even higher in price than the one preformed the design. Many reasons can be associated to
this; one reason is maybe the bidder didn’t want to take both contracts for limitation of
resources or other reasons.

STUDENT ID: 20050014 PAGE 72

 6.2.2 Case Study 2: Inter-Refinery Pipeline (IRP) Project

The second project studied for investigating problems to Procurement Strategy is “Inter-
Refinery Pipeline (IRP) project”. Table 8 summarizes the details of the project.

Project Title Inter-Refinery Pipeline (IRP) Project

Minimizing marine ships movement of Crude and Oil Products to protect
the Environment and reduce marine pollution.
Business
Minimizing road Tankers movement of Oil products to avoid accidents that
Strategic
results in hazardous effects of fire and explosion.
Objectives
Better operation control of transferring products between Refineries and to
products stations such as Airport, Mussafah and Al Ain.
Total Project Budget was Dhs. 400 Million
Project Budget, Feasibility Study price: Dhs. 4 Million
Cost and Price FEED price: Dhs. 7 Million
EPC price: 350 Million
Stage of the Feasibility and FEED phases are completed. EPC phase is on going
project
Feasibility Study scope: To study the feasibility of connecting Company’s
refineries through a pipeline network to minimize shipment and transfer of
products
FEED scope: complete engineering design of the pipeline network.
EPC scope: Transfer the Straight Run Residue (SRR) by a new pipeline
from Refiner 1 to Refinery 2 instead of current ship transfers.
Project Scope Transfer the Reformate and Naphtha by a new pipeline from Refinery 1 to
Refinery 2 instead of current ship transfers.
Transfer ULG 91, ULG 95, ULG 98, Jet Oil and Gas Oil by a new pipeline from
Refinery 1 to Mussafah Terminal and from Mussafah Terminal to Abu Dhabi
Airport and Al-Ain Terminal instead of road Tankers.
Place all associated required equipments and materials such as control systems,
pumps, valves, vessels, storage tanks and pipeline fitting and filters.
Have an efficient multi-product pipeline as per scope and specifications of
12” and 16”.
Have efficient product equipments described in scope of project as per
specifications and sent for company’s review and approval.
Agreed time for company’s review and approval of equipments delivered.
Project Provide an overall reliable operation of the pipeline.
Objectives Complete the project within schedule.
Testing, Inspecting and Operating the new Pipelines by January of 2008.
Achieve the targeted estimated cost which budget was allocated for.
Comply with all rules and regulations as works will be carried out of
company’s premises.

Table 8 Details of IRP Project

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Project Team
The project team consisted of:
- Feasibility Study Consultant
- FEED Engineer (Consultant)
- Project Management Team from Company:
o Project Manager (from Projects Division)
o Project Coordinator (from Projects Division)
o 4 Project Engineers (2 from Projects Division and 2 from Refinery 1 and 2)
o 1 Contracts and 1 Procurement Engineers (From Projects Procurement Services
Department)
- Project Management Consultant (PMC)
o Project Manager

Details of the Project

The case study of the project carried on surveying the Project using the case study from in
Annexure 3. Projects Division Manager and Contracts manager also referred to this project
during the interview; refer to Annexure 4 & 5. After the survey and interviews, the details of
project were given as follows.
Procurement selection was based on procedures of Feasibility Study, FEED, PMC and EPC
as separate tenders. Four contracts were made: one for Feasibility Study, one for FEED, one
for PMC and one for EPC. The Project Management Consultancy (PMC) contract was made
to manage all phases and contracts of the project.

All Tenders were on competitive bidding. Contracts types were all Lump Sum price basis
except for FEED and PMC which were on unit rates based on man-hour estimates. Payments
were on progress monthly basis against breakdown of the Total Lump Sum / Estimated price.

The Feasibility Study was completed in Sept., 2003. The FEED was completed in June, 2004
and EPC was awarded on 05 April, 2005). EPC will be completed in Feb., 2008.

FEED Engineer (Consultant) carried complete designing of the pipeline. Then, EPC was
tendered out on the outcomes of FEED. All EPC bidders were required to verify the FEED
during Tendering. No EPC bidders were excluded. Discussion of and problems in the project
are given next.

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Discussion (Problems in the Project)

Consultant completed the FEED design and accordingly the successful contractor carried the
EPC works. After, EPC was awarded; company has introduced a new product in the market
(ULG 91). ULG 91 has to be incorporated in the new pipeline which would result in a
dramatic change in the FEED. ULG 91 had to replace ULG 98 as the demand increase of
ULG 91 will reduce the demand of ULG 98. FEED 2 was introduced to be carried to design
the inclusion of the new product. The basis of FFED 2 should be FEED 1. The EPC was into
the scenario of suspension or completion. Company decided to keep EPC running and upon
completion of FEED 2, a variation order to EPC can be issued or a new EPC (EPC 2) can be
started. Company was also in the scenario of either issuing a variation order for FEED.
However, that was not seen feasible as the basis of FEED was the Feasibility study which
didn’t include ULG 91.

The final decision was to have another Feasibility study to incorporate ULG 91 and
accordingly a new FEED to be carried and a new EPC. This results in keeping the current
FEED and EPC running. Hence the project will end up have eight contracts. Four contracts
are for the current Feasibility Study, FEED, EPC and PMC. Additional four contracts will be
for Feasibility Study of including ULG 91, FEED, EPC and PMC for it.

This may result in a problem because the second Feasibility Study may suggest changes to
original FEED and EPC which are being built since original EPC is near completion. The
new design might suggest of removal along with additional facilities. This will result in
partial lose of original EPC items. Contracts Manager was asked for this (Refer Annexure 5).
As can be seen from the interview, he responded that there were many alternatives and the
best one was found to separate the FEED and EPC for the new product. This is in line with
management instruction and to allow for further competitive bidding strategy.

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 6.2.3 Case Study 3: Operational Improvement to Process Units Project

The third project investigated for the problems to Procurement Strategy is “Operational
Improvement to Process Units at Refinery 1”. Table 9 summarizes the details of the project.

Project Title Operational Improvement to Process Units at Refinery 1 Project

Reliable integrated operation of process units.
Business Optimising processing and best use of equipments.
Strategic Increase capacity and performance of units.
Objectives Reduce overcapacity loads to current units.
Increase production which maximizes profits.
Project Budget, Total Budget: Dhs. 55 Million
Cost and Price FEED price: Dhs. 3 Million and EPC budget: 52 Million
Stage of the FEED phase of the project completed. EPC phase is on going
project
FEED scope: to study the most optimal solution to various existing process
units at refinery 1 to maximize productions, increase reliability and
efficiency of the units. Outcomes suggested various items to be
implemented such as additions of treatment units, unwanted products
collectors to reduce density, regenerators, replacement with high efficiency
pumps, increase / add tanks .., etc.
EPC: to implement FEED of improving the process units as follows:
Project Scope a. Installation of listed items such as equipments and piping.
b. Equipment evaluation and rating as per design standards.
c. Integration of oily and storm water sewer system with existing facility.
d. Instrumentation and Control Logics.
e. Automation and Control system.
f. Civil, structural works, supports, loading and soil investigation etc for
equipment erection.
g. Extension of fire hydrants and fire detection and protection system.
Develop utilities requirement facilities, drainage facilities, and sewer
loadings required for equipments and integrate with existing system.
Specify & include supply of 2 year operations spare parts requirements
Specify & include necessary extended warrantees/guarantees in material /
construction work and overall system performance
Ensure suitable and optimum solutions at site conditions during the
implementation phase.
Project
Objectives Identify.
Update current operating procedure in order to match the proposed
modification.
Turnkey engineering, detailed design, procurement, construction,
installation, pre-commissioning, commissioning, testing, supply of two-year
operating spares and twelve- (12) months warranty period for the twenty
seven- (27) selected EPC items for implementation for the EPC project
Complete the project within its schedule and budget.
Table 9 Details of Operational Improvement Project

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Project Team
The project team for the project consist of:
- FEED Engineer (Consultant) (refer to Details below)
- Project Management Team from Company:
o Project Manager (from Projects Division)
o Project Coordinator (from Projects Division)
o 4 Project Engineers (2 from Projects Division and 2 from Refinery 1 and 2)
o 1 Contracts and 1 Procurement Engineers (From Projects Procurement Services
Department)
- Project Management Consultant (PMC) (refer to Details below)
o Project Manager

Details of the Project

The case study of the project carried on surveying the Project manager, Project Coordinator
and Contracts Engineer using the case study from in Annexure 3. After the survey, the details
of project were given as follows.

Procurement selection was based on procedures of FEED, PMC and EPC as separate tenders.
Feasibility study was not carried as the project only asks for modifications of existing units.
So, project was assumed feasible.

Two contracts were made: one for FEED and one for EPC. All Tenders were on competitive
bidding. Contracts types were all Lump Sum price basis even for the FEED.

Payments were on progress monthly basis against breakdown of the Total Lump Sum price.
PMC was part of FEED. The FEED consultant was required to carry the Project Management
of the EPC works also. The FEED was completed in May, 2001 and EPC’s tendering is still
on. EPC will be awarded sometime in June, 2008.

FEED Engineer (Consultant) carried complete designing of the modification. suggesting

modifications to current process units such as additions of treatment units, dehydration units,
unwanted products collectors to reduce density, regenerators, replacement with high
efficiency pumps and motors, increase / add tanks, drums, replacement with larger sizes
equipments .., etc.

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Then, EPC was tendered out on the outcomes of FEED. All EPC bidders were required to
verify the FEED during Tendering. Discussion of and problems in the project are given next.
First round of EPC tendering started in 2002 but was cancelled for limited number of bidders
participating. EPC second round started in July, 2007. The problems to this will be seen.

Discussion (Problems in the Project)

EPC was tendered twice. As seen before, FEED was completed sometime in 2001. First EPC
was started in 2002 and was cancelled after a long tendering cycle (around 1 ½ years).
The problems in cancelling the EPC tendering were:
1. Many bidders were incapable of undertaking the EPC works as the project call
for supplying huge number materials and equipments.
2. Participation ended in short number of bidders (2 bidders)
3. Both bidders didn’t agree on providing overall warranty. Warranty was to be
provided separately on every item only. As the items were to be installed
separately and since there is not integrity, the whole works can’t be granted to
be completed to the satisfactory of company.

Hence, Company decided that this tender to be cancelled and re-tendering to take place. Re-
tendering took place in July 2007. Bidders list finalized having seven bidders. Three bidders
declined to bid. The final technical bids were received from four bidders. The fourth bidder
was excluded because of requesting a cost plus contracting basis and not Lump Sum type of
contract. Company’s strategy to keep fair, equal and consistent bidding has resulted in
excluding this bidder as the rest agreed on Lump Sum price basis. Now, three bidders’
technical bids are being evaluated.

Because of re-tendering, FEED’s PMC part was not valid anymore. FEED Consultant didn’t
want to carry PMC on the open period and didn’t also validate FEED being too old. For
doing so, Consultant asked almost more than double price. Thereafter, Company looked for a
PMC consultant to validate the old FEED and manage the EPC works when awarded.
Company felt that there was no time to go on competitive bidding on PMC as award of EPC
can be done anytime. The bidder who was excluded for requesting a cost plus contract was
requested and accepted to carry PMC. Now, the PMC services tender from this bidder as
single source is being finalized. This might turn in a whole problem as the bidder not
accepting the contract type now will manage it on the basis of conflict.

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 6.2.4 Case Study 4 Refinery 2 Expansion Project:

The fourth project investigated for the investigating problems to Procurement Strategy is
“Refinery 2 Expansion Project”. Table 10 summarizes the details of the project.

Project Title Refinery 2 Expansion Project

Increase capacity of the Refinery
Business Meet the international and local demand of refined oil products
Strategic Reduce loads on current units
Objectives Increase production, Revenue and profitability through optimum processing
Project Budget, Not provided
Cost and Price
Stage of the Feasibility Study completed. FEED phase of the project is on going. EPC
project phase is still not initiated.
Feasibility Study scope: To study the feasibility of expanding the Refinery.
The study should include all possible ways to extend the current refinery
capacity from 120 KBPD to 250 KBPD.
FEED scope: The design based on feasibility study should include all
required process units additions and modifications of existing facilities,
utilities and processing units. The study shall come up with full engineering
design to the required works for expansion.
Project Scope EPC: to implement FEED of expanding the refinery as follows:
- Verify the engineering requirements for the expansion requirements
- Installation, testing, commissioning of all units including trains,
equipments as directed by company and consultant.
- Installation of listed items such as equipments and systems.
- Equipment evaluation and rating as per design standards.
- Instrumentation, Automation and Control systems.
- Civil, structural works, supports, loading and soil investigation etc for
expansion requirements.
Turnkey engineering, detailed design, procurement, construction,
installation, pre-commissioning, commissioning, testing, supply of spare
parts required for the expanded facilities.
Develop units, equipments and utilities required for the expansion
Project integrated with existing system.
Objectives Specify & include necessary extended warrantees/guarantees in material /
construction work and overall system performance.
Ensure suitable and optimum solutions at site conditions during the
implementation phase.
Complete the project within its schedule and budget.

Table 10 Details of Refinery 2 Expansion Project

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Project Team
The project team consisted of:
- Feasibility Study Consultant
- Project Management Team from Company:
o Project Manager (from Projects Division)
o Project Coordinator (from Projects Division)
o 4 Project Engineers (2 from Projects Division and 2 from Refinery 1 and 2)
o 1 Contracts and 1 Procurement Engineers (From Projects Procurement Services
Department)

Details of the Project

The case study of the project carried on surveying the Project manager, Project Coordinator
and Contracts Engineer using the case study from in Annexure 3. Annexure 3 shows the
responses from the Project Manager. After the survey, the details of project were given as
follows.

Procurement selection was based on procedures of Feasibility Study, FEED, PMC and EPC
as separate tenders. Feasibility study was completed in June, 2007. FEED tendering started in
July, 2007.

One contract is made for Feasibility Study. Feasibility Study was on competitive bidding and
so will be all Tenders of next phases. FEED tendering is on going. FEED was tendered out on
units rates based on man-hour rates. FEED award is projected to happen in March, 2008. EPC
and PMC Tendering will start upon completion of FEED. Contracts types will be Lump Sum
for EPC and units rates based on man-hours rates for PMC.

Payments were on progress monthly basis for Feasibility study, however adopted for
milestone activities based on percentages of total estimated price for the FEED. This is
adopted when one of the bidders rejected progress payments tender.

Feasibility Study consultant carried complete study of Refinery expansion setting the basis of
all designs. FEED started on the basis of Statement of Requirements from Feasibility study.
Discussion of and problems in the project are given next.

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Discussion (Problems in the Project)

This project is considered the most critical and strategic project to company. Upon
completion of this project, strategic objectives such as meeting international and local
demands and increase profitability, production, and capacity of units will be achieved. The
project (EPC) is forecasted to be completed by 2010.

Feasibility Study has delayed the start of FEED because of changes in requirements from
Company. Feasibility Study has taken double time its original completion period. Award of
Feasibility Study was in May, 2005 with completion period of one year. However, as seen
before completion took place in June, 2007. Three variation orders were issued to the
Feasibility study until completed.

FEED started on competitive basis of consultants and technical bids evaluation have been
completed. Upon approval of the technical evaluation, prices will be invited from consultants.
As seen before, some bidders of FEED didn’t accept monthly progress payments tendering.
Then this was then changed to percentage milestones as preferred. This is logical since the
contract type is based on units rated of man-hours.

Next section is concluding findings of common problems that are seen in Procurement
practices in the projects studied. It will be seen how these problems affected most of the
projects to achieve objectives that are inline with the reviewed Strategic objectives of TK Co.

6.2.5 Conclusion (Procurement Practices Problems in the Case Studies)

From the details and the responses of the case studies of projects given above, the
Procurement practices mostly identified in the projects were observed to be:
1. The split contracts of the project phases appeared in all projects
2. Contract Types of being Lump Sum appeared in many projects
3. Payment methods of progress payment appeared in almost all projects
4. Traditional methods of Tendering Procedures and lowest price wins

These practices were informed to be procedural; however they were seen permanent to
almost all projects without being adapted to different project objectives and strategic
objectives for the particular project. In the first Case Study, Lump Sum price for FEED was
seen to be problematic when changes were made. Having a Lump Sum contract type couldn't

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allow the basis for calculations of the change. If unit rates were implemented, the problems
would have been solved and the change would have been transparent. Units rates based
contract was seen in Literature as one of the contract types and should have been
implemented here.

Also, to link strategic objectives, the above further entail combination of FEED to EPC (D/B
method seen in Literature). The separation of FEED and EPC was seen problematic in
achieving strategic objectives of the project. Some strategic objectives of the project in case
study 1 were:
 Complying with HSE standards
 Allowing for competitive advantage

Because FEED was separated from EPC, it limited the competitive advantage in the EPC
when Inergen was proposed and seen solely supplied by one party. Hence, Strategic objective
of completive bidding was about to be altered. Also, HSE standards didn't specify one gas,
so choosing multiple gases didn't contradict the strategic objective of complying to
international HSE.
In Case Study 2, when the new product (ULG 91) was introduced. If D/B (FEED + EPC) was
considered to be implemented from the start, as also agreed by the Contracts Manager, there
wouldn’t be a need for FEED 2 and EPC 2. The changes in FEED 1 and EPC 1 that would
result in loss wouldn’t have to be a concern. The strategic objective of receiving the best
value of cost is altered.

Further, in Case Study 3, we have seen the problems of FEED being invalid for the long
period of EPC. The combination of the two would have carried the validity together. The
strategic objectives of increasing productivity, increasing capacity and optimizing processing
are not achieved when EPC was seen not able to be carried.

There are no many problems can be seen in Case Study 4; however following the same
manner would also result in the same problems. Feasibility Study for the project was seen
gone through almost three variations. Again FEED and EPC will carry problems if same
procedures of the other three projects are carried. This is the most critical and strategic
project to Company so lessons should be learnt from other projects. Also, although contract
type was on units rates based on man-hours, still progress payments was retained. As
complained by bidders this was then changed to percentages of milestones payments.

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The tendency to select the final contractor / consultant and award on lowest price basis was
appearing in all projects studied. There is no specific problem to this; however, this explains
the long period or tendering cycle which increases the costs of overheads. To ensure that all
prices submitted were technically feasible; a long cycle of clarification process is taken place
in every tender. Bidders had to confirm technical requirements after they submit technical
offers. It took so much time to achieve a uniformity of technical revised proposal before
receiving prices. This also results in receiving high prices on the revised offers. Again this
alters the strategic objectives of receiving the best value for costs and prices.

Fixing these above Procurement practices and process, in the projects studied and not linking
them to specific project needs, results in problems to achieve projects objectives that are
inline with strategic objectives seen. Table 11 below shows the resulting problems appeared
or likely to appear because of these practices as expressed in the survey.

Project Manager, Coordinators, Engineers and Contracts Engineers

No.
Problems encountered in Procurement Processes for the projects
1 Improper Payments Systems (delayed and unlinked payments to work milestones).
2 Improper Risks allocation and control because of Lump Sum contracts.
3 Improper understanding of responsibilities of parties (Client's and Contractor's).
4 Owner incorrect interference in Contractor/Consultant’s Activities.
5 Lengthy Procedures of Tendering (Cycle Time for Contract Award).
6 Improper Consultant and Contractors Selection Criteria
7 Lack of Visibility: Ambiguities in requirements.
8 No Contractor / Consultant Relationship Management / Profile / Performance.
9 Unlawful acts or practices for not understanding legal aspects.
10 No Linked Incentives / Motivation to Liquidated Damages.
11 Improper Commercial Register – Ratings of Contractors and Consultants
Table 11 Problems Identified in Procurement Processes for the Oil & Gas Projects Surveyed

The above problems additionally affect achieving the projects objectives, as seen in the case
studies, and ultimately achieving strategic objectives of the projects.

Suggestions from respondents for these problems along with the advanced strategies
addressed in Literature to improve the current Procurement processes for Oil & Gas projects
will be covered in details in the next Chapter, Recommendations (Chapter 7).

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 Chapter 7
7. RECOMMENDATIONS

This section of the Dissertation is intended to propose recommendations and offer solutions
to the problems investigated in research methodologies (Cases Studies). This is also by
referring to the objectives and hypothesis of the research supported by Literature and the first
research methodology developed (Linking Procurement to Business Strategy).

The hypothesis to the research proposes that Procurement Strategy is to be linked to

Corporate / Business Strategy for outsourced projects. This is to better serve the projects
objectives achievement.

However, hypothesis model was modified to include SCM in the process for attaining
strategic goals and involvement of Procurement (Refer Figure 17, Chapter 6).

Hence, in order to maintain the link to Business Strategy and achieve Strategic objectives, it
is recommended that Oil & Gas Project Procurement Strategy should adopt advanced
strategies mainly in the following areas:

1. Advanced Procurement Methods and Systems

- Relationship Management: Partnering, D/B, etc.
- Systems and Sub-Systems selection
- Right Contractors and Consultants Selection
2. Proper Contracting Strategy
- Contractor / Client Roles and Rights
- Responsibilities of each party
- Incentive contracts, Payment Systems and Risks Management
3. Realization of Corporate Business Strategy
- Implementation of Proposed Model of Procurement Strategy
- Implementation of a Procurement Strategy checklist developed for a project

Hence, the details of these identified Procurement Strategy areas with recommendations for
improvement will be given next.

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7.1 Strategic Procurement Methods and Systems for Oil & Gas Projects

Procurement Strategy includes Procurement methods, such as Partnering and Alliacing. We

have seen in Literature these strategic arrangements which translate into long term benefits
for organisations and firms. Adopting such strategies will involve higher management, place
Procurement within the strategic plans of the organisation and improve relationships. These
arrangements might not seem viable for normal projects, however, they should be considered
for critical projects affecting strategic goals of the organisation (i.e. long term supply of Oil
products and long term purchase of Power). Once these strategies are adopted, we will
obviously recognize the strategic position of Procurement in Oil & Gas.

For Major Projects, it is recommended that Oil & Gas industry considers the D/B method
clearly explained in Literature. We have seen the FEED and EPC phases of an Oil & Gas
Major project. Although EPC refers to Engineering, Procurement and Construction, this is a
different method from the D/B method used in the Building and Construction industry, as
suggested in Literature.

An Oil & Gas ‘Major Project’ still carries a FEED phase which represents the Design phase
in Building and Construction industry. Therefore, FEED and EPC phases can be combined
together to eliminate problems for Major Projects resulting from separating Design and
Implementation phases, as highlighted in Literature. There is a confusion, which needs to be
clarified, that many practitioners in Oil & Gas think that EPC is similar to D/B in construction;
however, as shown above, Design phase is separated from Implementation since FEED phase
is separated from EPC. Therefore, EPC is basically only the Construction phase; and the
Engineering part of it is just the actual implementation of the Engineering Design (FEED).

Hence it is recommended that Oil & Gas adopt the D/B method used in Building and
Construction industry in Procuring for a Major Project which suggests that Design and
Implementation of a project is handed to one Contractor. However, the current method can be
kept if desired for small projects where minor Design or no Design is required.

Procurement Strategy also entails Procurement Systems. We have seen in Literature the
advanced strategies proposed, such as what Cheung et al (2001) offered for procurement
selection by enhancing objectivity. The systems they selected (MAUT and the AHP) as
critical procurement selection criteria and procurement strategies commonly used in Hong
Kong can be suggested here.

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The justification is that against these criteria, utility factors corresponding to various
procurement strategies can be assigned by the experts. As they explained, to cater for
individual project characteristics, the relative importance weightings of the selection criteria
can be assessed using the analytical hierarchy process. Final selection can be then based on
the highest utility value derived from procurement strategies, taking into account the relative
importance of the selection criteria. We have also seen procurement systems and sub-systems
for a project proposed by kumaraswamy (2006). Refer to Figure 11.

Literature also suggested several criteria and systems for selecting contractors and suppliers.
It also offered contractor's evaluation criteria. Hence, it is suggested that Oil & Gas gives up
traditional methods in selecting contractors and evaluating the bids based on lowest price
scenario.

As Literature highlighted, evaluating commercial bids and selecting contractors based on

lowest price bid basis has proven to be an ineffective approach. It is suggested to look at the
new evaluation paradigms such as what Wong, Holt, and Harris (2001) proposed, a Multi-
Criteria Selection (MCS) tender price matrix to comprehensively evaluate preferences and
use the same in bidder evaluation process, as in Mahdi, Riley, Fereig and Alex (2002)
Multiple-Criteria Decision Support System (MCDSS) for the selection of the most
appropriate contractor. Their system can accommodate the unique characteristics of a project
in addition to the qualifications and capabilities of those contractors assessed.

Their system first evaluates the list of contractors by matching their qualifications with
specific project conditions. A short list of eligible contractors is thus selected and MCDSS
then compares the current capabilities of short-listed contractors and their plans for the
project under consideration, to select the most appropriate contractor. It is claimed that the
system can be easily modified to adopt specific conditions of the project and also to facilitate
the decision maker in explaining the reasons for the elimination of excluded contractor.

7.2 Contracts Management and Strategy for Oil & Gas Project

Contracts Management and Strategy was seen in Literature as part of Procurement Strategy
(APM, 1998). Contracts Management and strategy cover the relationship and responsibilities
of parties in the contract document, Contract Type, Terms & Conditions, Pricing, Payment,
Liquidated Damages and Risk Management which should clearly placed in the contract. As it
was stated in Literature these contracts should be formed for smooth execution of the project

STUDENT ID: 20050014 PAGE 86

and not to add complications to the project. For effective contract Strategy these contract
related issues should move from traditional practices such as Lump Sum contracts and Risks
allocated to contracts to a more collaborative contracts responding to projects and strategic
objectives. Just like project and strategic objectives of the project differ from one project to
another, these contract implication should be dynamic to projects needs. One of the
suggestions is that Setting liquidated damages should have Incentives clause against it. As
seen in Literature if contractors are being penalized for delays, they should be motivated for
early completion and high performance. Another suggestion is that not all types of contracts
should Lump Sum basis as consultancy services should be in basis of consultants’ hourly,
daily or monthly rates. Company is found relaying on Lump Sum contracts to avoid
monitoring and counting of quantities to calculate the total rates.

Reference is also made to the study carried by Oyegoke (2001) on the framework for
construction management contracts practices in the UK and the US by exploring the main
delivery methods. As construction management contracting types, processes and procedures
and interaction between construction manager and other stakeholders, Contracts Management
systems within each practice and between both practices; the distribution of responsibilities
and risks both in pre-construction and during the construction stages; and allocation of
responsibility in both practices were examined.

Differences were found in US, UK and Japanese approaches as manifested in user's

requirement, project finance, internal construction process, feedback and learning
information. Further, these differences between the contracting systems are the contractual
ties and assignment of responsibilities of the parties, the contracts within the system, and their
performance requirements. Finally the importance of having clear divisions of scope from
owners regardless of differences in systems was highlighted.

As they identified it, the superior performance of Japanese contractors is attributed to their
working practices which were characterized by the use of a larger workforce on site, detailed
planning, close working relationships with their subcontractors, and an overriding focus on
time certainty. it is not clear whether these issues deal directly with Procurement Strategies.

As also suggested from the surveys Procurement processes should consider different actions
to resolve problems in projects. Table 12 below shows all suggestions by respondents to
resolve the problems in the Procurement Process for the projects and managing contracts.

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 From Project Manager, Coordinator, Engineer and Contracts Engineer
No. Actions, Strategies and Suggestions for Improving Procurement Processes for
Oil & Gas Projects
1 Understanding legal systems and the role of law in contracts

Understanding and linking Financial Systems (i.e. Pricing Basis, Payments Terms
2
and Bank Guarantees) to Scope of Project.
3 Motivating Contractors / Consultants through Incentives systems not just
penalties. Proper Risks allocation and control.
The added Value and Collaborative Contracts Management: Better understanding
4
of responsibilities of parties.
5 The right Tendering and Contractor / Consultant Selection practices

6 Techno-Commercial Evaluation and Commercial Transparency

7 Improving Internal Contract Management Procedures.

8 Contractors Performance Data Maintenance.

Table 12 Suggestions and Actions by in Procurement Processes for Oil & Gas projects Surveyed

7.4 Project Procurement Strategy in Oil & Gas to Realise Business Strategy.

It is seen in Table 12 the suggestions in Procurement processes for Oil & Gas projects
identified by the projects respondents. In summary, the contention is that Procurement
processes in Oil & Gas should realise the Business needs and Strategy. This is established
when Procurement Strategy links the objectives of a project to Business objectives.

In addition, the responses emanating from the survey of an Oil & Gas Project respondents as
summarized in Table 12 are recommended to not only solve the problems but also to develop
the effective Procurement Strategies (linked to Corporate / Business Strategy) for projects.
Oil & Gas should consider such suggestions from its practitioners.

We have seen the emphasis in which perceptions on Corporate / Business objectives where
altered in the problems of the projects studied. It was also seen the procurement problems in
managing FEED and budget of the project. The recommendation here is that a balance
between Strategic objectives, project objectives, costs should be obtained in order to achieve
the best value of the project to Company. A balanced management will optimise the value to
Company through proper Procurement Strategy. As for project Strategy, linking Project
needs and objectives to business requirements should be formed at end of every stage such as

STUDENT ID: 20050014 PAGE 88

the FEED and EPC phase to ensure viability for Implementation. Projects are carried to fulfil
business needs otherwise there is no use for them. Project Strategy inline with Business
Strategy is realized in achieving the value intended which is through implementing proper
Procurement Strategy for the value of the project.

One of the methods as also Literature suggests is the strategy review at every stage of project
development. In the first project studied, Company’s strategy doesn’t constrain specific gas to
be designed rather the most valuable gas to replace Halon to comply with HSE standards.
Therefore the gases which require no system change to Halon were worth to be selected for
the optimum gas identical to Halon. Therefore, it is recommended here to manage the
procurement involved during FEED phase and the involvement in the EPC phase. The use of
proper procurement strategies such as D/B can help achieving this desire. If FEED was
included in the EPC, the optimum design that’s handled by the same Contractor / Consultant
can follow the EPC. As the strategic objectives are aligned with project objectives, they
should be aligned to Procurement Strategy to receive the necessary viability of FEED to EPC.

Hence realisation of Strategic objectives is through the following:

 Corporate / Business objectives review: Portfolio and Program Management.
 Project objectives setting in lieu of Business objectives
 Defining Project’s Scope in lieu of Project objectives
 Setting the Proper Project Strategy for Project’s Scope
 Setting the Proper Procurement Strategy for Project’s Strategy
o Procurement Methods and Systems
o Contract Strategy: Contract Type and Payment Method
o Relationship Management: Contractor Selection, Dispute Resolution, Delays
and Claims management.

Covering the above and specifically for a project, a Procurement Strategy selection checklist
is developed in Annexure 6. However, the developed Model of Procurement Strategy for
projects in Oil & Gas Industry to realize Corporate / Business Strategy is shown Figure18.
This is suggested to Oil & Gas projects; however, also applicable to projects concerning other
industries endeavour management by projects.

STUDENT ID: 20050014 PAGE 89

 Corporate / Business
Strategy

Outsourcing
Strategy Business Management
Strategic
Objectives
Achievement
Supply Chain Portfolio
Strategy Strategy
Strategic Relationships
- Alliancing Portfolio Management
- Partnering

Procurement Program
Project
Strategy Strategy
Objectives
- Procurement Methods and Systems Achievement
- Contractors Selection Criteria
Program Management
- Contract Strategy
- Managing Relationships Project Management
- Managing Claims, Delays and variation
- Dispute Resolution
Project
Strategy

Figure 18 Procurement Strategy Model Suggested for Oil and Gas Projects

As we have seen in the analysis and discussion section, Procurement Strategy should be
linked to overall Business Strategy. As we have also seen in Literature, Johnson and Scholes
(1999) stated that Business Strategy is likely to be concerned with long term direction of an
organisation, especially for a big multinational company; Strategy facilitates achieving a
prominent position of becoming the “industry standard” recognized by suppliers and buyers.

Also we have seen, relationship management is what links procurement to SCM and hence to
Overall Business Strategy; as seen in Cheung’s (2006) explanation of sustainable supply
chain which requires a proactive relationship management. Hence it is recommended that Oil
& Gas consider improving its relationships with Contractors and Suppliers which can be
applied through Procurement Methods. The second part of the Hypothesis to the Dissertation
suggests that an Effective Procurement Strategy includes Procurement Systems, Procurement
Methods, Contract Strategy, Contract Types, Contractor/Client Relationships, Financial

STUDENT ID: 20050014 PAGE 90

issues, Risks Management, and performance of the project for it to be effective. The
Literature and research methodologies have also supported and accepted this part.

All the above are recommendations to current procurement processes and practices for
projects in Oil & Gas for implementation. Also the above, once implemented in Oil & Gas
and used in other industries should support the hundreds of on-going projects in UAE and the
retention of Consultants and Contractors expertise, share and potential interest from all over
the world in the development of this country.

With regard to Procurement and Project performance, a little research was carried in this
regard. We have seen Literature addressed the issue and related it to procurement. Xiao and
Proverbs (2002) tackled the issue examining contractors’ performance in different countries
to distinguish their own strengths and weaknesses to improve their competitiveness
accordingly. However, this was to serve the purpose of contractors’ selection criteria and not
the performance of the project. This is highlighted in the conclusions in the next chapter.

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 Chapter 8
8. CONCLUSIONS AND FURTHER RESEARCH

The Hypothesis to the research on linking Procurement Strategy to Corporate / Business

Strategy can thus be said was acceptable through research methodologies and shaped through
Literature review. Objectives also were achieved throughout the research. Hence,
Procurement Strategy when aligned to Corporate / Business Strategy will aim at achieving
Project and Business Objectives, improve Contractor/Client relationship, and get its due share
in Business Vision, Mission and long term strategic plan. Procurement processes in Oil &
Gas require advanced strategies which are recommended for implemented.

However, a Procurement Strategy that avoids Project-stage ambiguities and helps to drive
Projects to success in terms of performance was not achieved through research. This was not
the main aim of the research; however, the issue was highlighted in Literature with rather
poor results in research methodologies. Hence, this particular view is recommended for
further research. Future research can examine Procurement Strategy's effect on Project
Performance. Whether effective Procurement Strategies improve Project Performance can be
further assessed. This is an important area for further research as it can be seen to complete
the full picture of Project Procurement. This research aimed at Strategic effect of
Procurement in an organisation. Inline with it if a research in the suggested area is carried
will give the complete research on procurement from top (Strategic position) to down
(Project performance) of an organisation.

STUDENT ID: 20050014 PAGE 92

 Annexure 1
Phases and Activities of Oil and Gas Major Projects,
(TK CO., 2004)

The general phases and activities of a Major Project in Oil & Gas industry are:

1. Feasibility Study and Project Initiation Phase

The broad description of project needs, requirements and Scope. The activities during
this phase are:

 Identifying Stakeholders of the project by corporate management.

 Identifying Strategic needs, requirements, and benefits.
 Viewing Project’s essence in lieu of Business plans.
 Carrying Project’s Feasibility Study.
 Establishing Project’s initial Statement of Requirements (SOR).
 Carrying Project’s Conceptual Design and Engineering.
 Review engineering disciplines required from functional Departments.
 Meetings and forming the Project team.
 Identifying and allocating tasks to team members.

2. Project Front-End Engineering Design (FEED) Phase

Including PRE-FEED phase in which project plans are set; and the actual FEED phase in
which Design plans are worked out and FEED engineer proposals are reviewed.
The activities are:

 Finalizing FEED requirements from the SOR.

 Choosing among alternatives available.
 Appointing the proper FEED Engineer.
 Establishing preliminary plans for the Project.
 Establishing preliminary cost estimates for the Project.
 Identifying applicable standards such as HSE and QA/AC plans.
 Developing Project Charter which outlines key information.
 Supervising and managing services of the FEED Engineer.
 Reviewing the FEED to ensure conformance with Project requirements.
 Market analysis and searching on products specified to review availability.
 Communicating comments on the FEED with the Engineer.
 Coordinating Design Outputs to concerned departments and users.
 Carry out final modifications in coordination with FEED Engineer.
 Approving and proceeding with the final FEED for EPC Tendering.

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3. EPC Tendering Phase
Transferring the FEED into EPC Tender Package and communicating it to EPC
Contractors for implementation. The activities are:

 Setting Scope of Work (SOW), Drawings and Specifications from FEED.

 Preparation of Enquiry Documents for the EPC (Tender Documents).
 Setting the Procurement plans for the EPC Tendering.
 Selecting EPC bidders and pre-qualifications process.
 Issuing the EPC Tender to bidders.
 Responding to clarifications by EPC bidders on the FEED Design.
 Reviewing and Evaluating EPC bids to ensure compliance to FEED design.
 Technical and Commercial evaluation process as per procedures.
 Awarding EPC to successful Contractor.

4. EPC Implementation Phase

In which the project after award to the successful contractor is kicked-off, executed and
handed over to Company.

 Kick-off Meeting with the Successful Contractor.

 Monitoring Procurement of Materials and Implementation as per SOW.
 Supervision of EPC Project Execution.
 Reviewing, Issuing and monitoring Contractor’s invoices and payments.
 Preparations of Value Engineering to ensure activities are as per schedule and plans
as in terms of Time progression and Budget provisions.
 Contract Administration activities

STUDENT ID: 20050014 PAGE 94

 Annexure 2
Questionnaire Form

Questionnaire – Procurement Strategy for Oil & Gas Projects

ANSWERS
QUESTIONS (PLEASE ADD YOUR REMARKS) REMARKS
YES NO MAYBE

Should a Procurement Strategy for Oil & Gas x Need to know

projects be part of Business Strategic Vision, direction of business.
Mission and long / short term plans?
Should Procurement Strategy for Oil & Gas x Achieving overall
Projects aim at achieving overall Business / business objectives
Organisational objectives? is very important
Should higher management in Oil & Gas be involved x
in setting Procurement Strategy for the Projects?
Should the Procurement Strategy of Oil & Gas x This should come
improve Organisational and Business with the business
relationships? strategy.
Do you think Project Management in Oil & Gas x What are advanced
lacks understanding of advanced Procurement Procurement
Strategies? Strategies?
Are there Procurement Strategies and Practices in x
more developed countries (i.e. UK, USA, Japan
etc) which can be implemented here?
Does an effective procurement Strategy improve x
project performance?
What areas should a Procurement Strategy include to be most effectively linked to Overall
Business / Corporate Strategy: (respond to the areas proposed and/or suggest others)
1. Procurement Systems and Methods? x Other areas:
2. Contractors / Consultants Selection? x 8. Supply Chain
3. Contract Management & Strategy? x 9.
4. Risk Management? x 10.
5. Financial rights and Payment Terms? x 11.
6. Project Performance x 12.
7. Relationship Management x 13.
8. Dispute, Delays, Claims, and Variations? x

OTHER COMMENTS

Name: Hardip Kartar

Industry: Construction
Designation: Regional Bid Manager
Qualifications: BEng CEng MICE MIEM

STUDENT ID: 20050014 PAGE 95

 Annexure 3
Project Case Study Survey Form

Procurement Strategy for an Oil & Gas Project

Procurement in this research covers all commercial aspects of a project (i.e. Materials, Contracts
Management, Tendering, Bidding, Awarding and Contract Administration)

PROJECT TITLE REFINERY 2 EXPANSION STUDY

Feasibility Study scope: To study the feasibility of expanding the Refinery. The
study should include all possible ways to extend the current refinery capacity from
120 KBPD to 250 KBPD.
BRIEF SCOPE
FEED scope: The design based on feasibility study should include all required
process units additions and modifications of existing facilities, utilities and
processing units. The study shall come up with full engineering design to the
required works for expansion.
EPC: to implement FEED of expanding the refinery.
What is the stage of the project Increase capacity of the Refinery
Meet the international and local demand of
(Conceptual Design, FEED, EPC) and whether
refined oil products
(Under Tendering, or % Completed) Reduce loads on current units
Increase production, Revenue and
profitability through optimum processing
Not provided
What is the Budget, Costs and Prices of the Project?

What are the Corporate / Business Objectives for Feasibility Study completed. FEED phase of
undertaking the Project? the project is on going. EPC phase is still not
initiated.

What are the Project specific Objectives? Turnkey engineering, detailed design,
procurement, construction, installation, pre-
commissioning, commissioning, testing and
supply of spare parts required for the
expanded facilities.
Develop units, equipments and utilities
required for the expansion integrated with
existing system.
Any Project Objectives for other purposes than Project will Comply with Environmental
those of business (i.e. Legal, Environment, Political standards
… etc)?

What is the Procurement Method selected (i.e. EPC model is option pursued with
Partnering, Design (SOR or FEED), Build (EPC), competitive bidding.
Design and Build (FEED & EPC), Prime
Contracting, …etc) Please explain

STUDENT ID: 20050014 PAGE 96

Was the basis of the Procurement selection to EPC model as described above.
achieve Project and Strategic objectives? Or
Traditional, Procedural and others? – Please explain
in details.
What is the Type of Contract selected? (i.e. Lump Project is in FEED phase which is
Sum, Unit Rates, Cost plus, …etc) Please explain if reimbursable based on estimated man-hours.
also mixed types are selected. Technology provision is lump sum.
Was the basis of the Contract Type selection to In accordance with Company Procedures and
achieve Project and Strategic objectives? Or Standards
Traditional, Procedural and others? – Please explain
in details.
For Tendering and Award, what was the basis of FEED and Technology Provision based on
Bidders selection, Final Contractor / Consultant competitive bidding
selection?
Were the bidders competitive (Technical Major Engineering Contractor Bid FEED.
Capabilities, Organisation Sizes, Commercial Technology to be supplied by one of two
Capabilities, Manpower, Profession, …etc) Technology providers
None
Has any bidder been excluded? What were the
reasons, for exclusion / non-exclusion?

What were the Payment Terms selected (i.e. Both Milestone and Progress payment for
Milestone payments, Progress payments, percentage services provided
payments, Reimbursement, …etc) Please explain
What is the basis of Payment Terms selected? (i.e. Contract Standard in accordance with
Contract Standard, Traditional, Policy, Nature of Company procedures
project, some specific reasons) – please explain
Does the contract specify any Risks allocated to There is limited liability clause for FEED
Company? Or all Risks are placed to Contractor / engineering and Technology provided
Consultant? Please explain
What are schemes specified in the Contract for Company Standard covered in Agreement
handling Claims, Delays, and Disputes? (i.e. Agreed
with contractor, standard contract, changed with the
nature of contract, Strategic …etc)
Did any Contractor / Consultant during tendering Negotiations to reach mutual Terms and
complain for not accepting any commercial matters Conditions were protracted
such as (Procurement method, Contract Type,
Terms and Conditions, Risks allocated, Payment
Terms, etc)? If any, how were they resolved?
Do you think any of the Procurement activities / Today’s Market is difficult due to high
processes specified above caused any problems to commodity prices and high demand for Oil
the project in achieving Project or Strategic & Gas services Projects
objectives? Please explain how.
Any general problems occurred in the project (i.e. None Yet. Just entering FEED
Delivery of Materials, Delays, Progress,
Performance, Claims, Disputes on the Contract,
Payments ….etc) Please state the problems and
bases.

STUDENT ID: 20050014 PAGE 97

What changes and developments do you think
should be made to the project Procurement activities
/ process specified above or in general to serve the None specific
project better? How would these changes or
developments contribute to a better project, say in
achieving objectives or strategic objectives?
Did higher management (i.e. GM, AGM, and
Division Manager) involve in any of the Commercial
Matters specified above (Procurement Method,
Contract Type Selection, Contractor / Consultant High Management are involved in all cases
selection, Payment Terms, Terms and Conditions of
Contract, Risks Allocation, Claims Delays and
Disputes? And when problems arise? Please Explain
their involvement on each.
What activities / phases of the Project did you As above with discussions at Projects
involve higher Management in (Project initiation, Steering Committee – Approval through
Planning, Procurement, Start, Execution, Closing, Tender Board and finally Chairman of the
Meetings … etc)? and how? Please explain where Company
and when they were to be involved, informed, asked
for decision or not required.
OTHER COMMENTS NOT COVERED OR TO BE ADDED NONE

Thank you so much for your time, your responses will greatly help in developing the research.
Name: Philip Harrison
Designation: Senior Project Manager
Qualifications: B. Tech., MICHEME, C. Eng.
Signature: 23.01.08

STUDENT ID: 20050014 PAGE 98

 Annexure 4
Interview with Projects Division Manager

S: After greeting, I am doing a research as a part of my Project Management program. The

research I am doing is examining the link between Procurement Strategy of our
Company’s projects to our Company’s Corporate and Business strategies. The argument
is there is a missing link between projects undertaken to the strategic objectives of the
Company. It is proposed that Procurement Strategy in projects fills this missing link or
the gap that’s why projects undergo many problems. It will help further to develop the
research if I ask your opinion on this and ask you a couple of questions on how the
projects you handle are procured as your position is at the middle between higher
management and project managers reporting to you.
D: Sure, very good, that’s a very good program and I wish you all the best. This is a very
interesting topic also and I will do my best to support and assist you in your research with
all information you need.
You might already know our Division’s structure. We have many project managers
(around 8 or 9) and all are handling different types of projects. Our projects vary in
nature, size, criticality, disciplinary and costs and estimates. All the project managers
have projects teams from engineers to secretaries working on the projects whether the
team is from our division or constituting of members from other functional departments.
What would you like to know? You may ask me general questions and you can see other
project managers and team for specific questions.
S: Sure, then I would like to know the strategic objectives of undertaking a project and some
projects’ objectives. Also, how procurement of a project is carried, what are the
processes, criteria and basis of procuring a project? I would like to know your
involvement and how you involve higher management in procuring a project. You may
give me examples as you prefer.
D: As far as strategy of the projects, Business Development Division takes care of all
strategic requirements of undertaking a project. They review on Business cases whether a
project should be launched. They review with general management the necessity of
starting a project. Many projects have deemed unnecessary to be undertaking and many
others have been launched for their strategic objectives or specific functional
requirements. All the projects launched to us have gone through a market research and
feasibility study on Business requirement and impact from the Business Development
Division. Of course my self and all project managers know and get involved in the
STUDENT ID: 20050014 PAGE 99
 strategic background of the projects and the projects objectives. We know that strategic
objectives of projects can vary from developing the company and it operations to higher
standards, support the environment or development of country’s and its economy.
As far as procurement, we have within our division a contracts department team who also
report to the Procurement and Contracts Division within our company which you are part
of. Contracts department team prepare all the tendering requirements, tender documents,
and pre award activities of our projects. Our project managers work closely with contracts
department on procurement of the project. Of course procurement in my opinion is linked
to projects objectives which are at the end linked to Business objectives.
I agree on the principle that project procurement should be linked to Business Strategy;
however, whether this is carried in practice, I am not sure this is done through
procurement and contracts division and I am sure they have basis of carrying procurement
of a project to predefined requirements they have within their core of functionality. I
however emphasise that as a minimum requirement for procurement of a project is to suit
the project’s requirements to support achieving Business requirements. It is more
important that a project achieves Business strategies than procurement itself to do so.
S: Is there an example of a project to illustrate all this?
D: I have worked as a project Manager for sometime for the IRP project.
The strategic objectives of the project were to minimize the marine ship movement and
the road tankers movement which reduce marine pollution, protect the environment and
decrease the rate of accidents that cause explosion of the tankers. The project objective
was to complete the project successfully without delay to ensure quick implementation of
the strategy. Another is to assign the best consultants and a contractor to achieve the
desired needs to the highest value and quality to both the project and company. Finally,
the objective was to implement, operate and maintain the pipeline network to the
specified standards. These were the strategic and project objectives.
S: What about Procurement processes of the project in lieu of these objectives?
D: Generally Procurement involved different contracts to different stages. Contracts involved
Feasibility Study Consultant, FEED Consultant and EPC Contractor. Procurement of the
project was following company procedures and standards which were suiting the project.
There were no major concerns as I recall. I can’t comment much on Procurement and best
is to see the project manager and team. Also, best is to see the Contracts’ Manager for
specific answers.
S: Sure, I will continue discussing Procurement of this project with the team. Thank you
very much for your discussion support in the interview.

STUDENT ID: 20050014 PAGE 100

 Annexure 5
Interview with Projects Procurement Services (Contracts) Manager

S: After greeting, I am doing a research as a part of my Project Management program. The

research I am doing is examining the link between Procurement Strategy of our
Company’s projects to our Company’s Corporate and Business strategies. The argument
is there is a missing link between projects undertaken to the strategic objectives of the
Company. It is proposed that Procurement Strategy in projects fills this missing link or
the gap that’s why projects undergo many problems. It will help further to develop the
research if I ask your opinion on this and a couple of questions on the projects and their
procurement as you are a contracts manager and a focal point in projects procurement.
C: Sure, this is a very good topic. However, we have to be careful since projects are always
inline with Business strategic objectives. Procurement of a project is in support of the
project to achieve objectives of the project to Company’s policy, procedures and
standards. Now, procurement itself is a strategic process and the project goes through it as
part of strategic objectives. You are talking about Procurement Strategy which is part or
set by Business Strategies in delivering a project.
S: But don’t you think that objectives whether specific to projects or strategic change from
project to another? What is the case of Procurement, does it change with the project and
shouldn’t it change with the changing objectives?
C: There are procedures and Procurement policy which are given by management and
projects with their objectives should go through and abide by the rules and procedures.
We deviate sometimes from procedures for some of projects needs; however, this is
decided by management.
S: What can be an example of this?
C: For some projects we had to change from competitive bidding strategy to single source
when services are only provided by one company. This is again a Company policy to
have a competitive advantage however for the project’s need; we justify to management
such deviation. Also, Procurement of a project should be in away to minimize the
problems that cause in delays and prevent it from achieving objectives.
S: If we chose a project, like the IRP and ask you the basis of selecting Procurement routes
and contract types. Projects Division Manager was interviewed for this project; however,
he advised to contact you for specific concerns regarding procurement of this project.
C: Sure, Procurement for this project was to standards it started with Feasibility Study,
FEED and EPC. The objectives of this project along with strategic objective did not
STUDENT ID: 20050014 PAGE 101
 require deviations from procedures and policy. Feasibility Study, FEED and EPC were all
through competitive bidding till the last selection of a consultant / contractor awarded.
S: Separation of phases and contracts of the project didn’t result in problems?
C: This process is according to procedures and problems are inevitable in any project. Most
important is that problems get resolved.
S: Any changes made to the project that affected Procurement routes?
C: Yes, when requirement was changed to include ULG 91, we had to form a contract with
another consultant to study inclusion of this product to the pipeline.
S: Why not as a change order to the current study?
C: The Feasibility and FEED were completed by then and EPC started and was near
completion when the product was introduced.
S: However, don’t you think this change and the new study may result in many changes that
most of deliverables in recent FEED and EPC might go in loss?
C: Yes, but we have studied different solutions and this was the best solution felt by
management.
S: You don’t think there were other solutions like FEED to combined to EPC.
C: Yes, but this is not the procedure and if it was from beginning; however the phases were
and had to be separated from beginning.
S: So, you think it is better to combine phases of FEED to EPC?
C: I don’t agree because there is no company capable of both. Most EPC contractors lack
Engineering capabilities which will require them to subcontract the activities. This is the
other way around to Consultants. Since the activities are majors and critical to a major
project, it is rather to form a contract with a main party than subcontracting them which
company will have no control over.
S: I see, but the concern here is the losses that original arrangements go through.
C: We have evaluated all proposals and picked the ones that we think will not result in major
changes or losses to the original contracts.
S: Selection of final Consultant for change was not based on lowest price?
C: It was through lowest bid price; however during technical evaluation we made bidders to
change proposals to maintain this and bidders didn’t confirm this were excluded. We have
gone through many clarifications and negotiations and this is how we reached to the final
acceptable offers.
S: There were no other problems like deviations requests from consultants to terms and
conditions, payment terms or legal issues?
C: There were many deviations mainly to terms and conditions from some consultants
however all were withdrawn to maintain the fair competition. The concerns regarding

STUDENT ID: 20050014 PAGE 102

 payment terms, we have considers some and changed to percentages milestones from the
standard progress payments after management agreed. Any legal deviations against
corporate policies were rejected.
S: Any bidders were excluded because of this?
C: No, they all agreed after explanations and negotiations before inviting price bids.
S: Don’t you think that this might increase prices?
C: Yes but maintaining procedures and policies are more important.
S: Also, prices are competitive and there are bidders who did not request deviations who
submitted competitive pricing, right?
C: Yes.
S: Last question, is what do you think should have been changed in procurement of the
project if anything to be changed.
C: I think we should have given the new contract of studying the inclusion of the new
product to the same consultant carried the initial study.
S: Why was this not implemented?
C: First, to comply with procedures, then to ensure valued prices and finally this was what
management advised to achieve.
S: Sure, thank you for your time and your valuable responses which are very helpful.
C: Sure, and Good luck in your research.

STUDENT ID: 20050014 PAGE 103

 Annexure 6
Proposed Procurement Strategy Checklist for Oil & Gas Project

1. PROJECT TITLE :

2. OBJECTIVES :
Strategic Objectives for the Project:






Project Specific Objectives:






3. PROJECT BRIEF SCOPE :








4. PROJECT CONTRACT TYPE :

 Services Reason for Selection / Link to Objectives:
 Works
 Consultancy
 EPC
Other, _ _ _ _ _ _ _ _ _

5. PROJECT BUDGET / ESTIMATE :

 Phase 1 ( _ _ _ _ _ _ _ _ _ ) Dhs. _ _ _ _ _ _ _ _ _
 Phase 2 ( _ _ _ _ _ _ _ _ _ ) Dhs. _ _ _ _ _ _ _ _ _
 Phase 3 ( _ _ _ _ _ _ _ _ _ ) Dhs. _ _ _ _ _ _ _ _ _
 Phase 4 ( _ _ _ _ _ _ _ _ _ ) Dhs. _ _ _ _ _ _ _ _ _

STUDENT ID: 20050014 PAGE 104

 6. CONTRACT PRICE BASIS :
 Lump Sum Price
 Total Estimated Price
 Unit Price
Reason for selection / Link to Objectives:

7. PAYMENT METHOD :
 Progress
 Milestones
Other, _ _ _ _ _ _ _ _ _
Reason for selection / Link to Objectives:

8. ADVANCE PAYMENT
 Yes
 No

9. PROJECT COMMENCEMENT DATE

 Award Date
 Non-Letter of Award Date
 Specific Date

10. WARRANTY
 12 Months
 More than 12 Months
 Special Warranty

11. PROJECT COMPLETION

 Completion Date
 % Completed to date

12. LIQUIDATED DAMAGES

 __ % of Contract Price
 Fixed Value/Occurrence

13. SPECIAL CONDITIONS / MODIFICATIONS

 (Yes, please specify)

 None

STUDENT ID: 20050014 PAGE 105

 Glossary of Terms

AHP – Analytical Hierarchy Process

Company – Refers to the Client in Oil & Gas (TK Co. as in the case studies)
Contract – Agreement between Company and Consultants or Contractor
Contractor – The EPC Contractor for the Project
Consultant – Oil and Gas Consultant for FEED, Feasibility Study or PMC
D/B – Design and Build Procurement Method used in Construction
EPC – Engineering, Procurement and Construction phase
FEED – Front – End Engineering Design phase
HSE – Health, Safety, and Environment
ISCM – Integrated Supply Chain Management
MAUT – Multi Attribute Utility Technologies
MCDSS – Multi-Criteria Decision Support System of Contractors
MSC – Multi-Criteria Selection of Contractors
PBO – Project Based Organisations
PM – Project Manager of Company
PMC – Project Management Consultancy
POO – Project Oriented Organisation
Project – Oil & Gas Project (Owner’s Project)
QA&QC – Quality Assurance and Quality Control
SCM – Supply Chain Management
SOR – Statement of Requirements for the Project before FEED
SOW – Scope of Work for the Project after FEED
TQM – Total Quality Management

STUDENT ID: 20050014 PAGE 106

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

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